Option Investor

Daily Newsletter, Thursday, 09/26/2002

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The Option Investor Newsletter                Thursday 09-26-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Headache?
Index Trader Wrap: Pinball Wizard
Market Sentiment: Window Dressing
Weekly Manager Microscope: Ed Choi/Richard Dahlberg: GMO Pelican

Updated on the site tonight:
Swing Trader Game Plan: Mixed Messages?

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      09-26-2002           High     Low     Volume Advance/Decline
DJIA     7997.12 +155.30  8012.42  7844.62 1.90 bln   2311/ 892
NASDAQ   1221.61 -  0.68  1239.62  1206.91 1.62 bln   1813/1500
S&P 100   428.51 +  6.83   430.75   422.54   Totals   4124/2392
S&P 500   854.94 + 15.28   856.60   841.26
RUS 2000  370.48 +  5.55   370.83   365.14
DJ TRANS 2269.42 +102.34  2269.42  2167.41
VIX        40.12 -  2.29    41.73    39.87
VXN        59.09 +  2.40    59.75    56.64
Total Vol   3,753M
Total UpVol 1,890M
Total DnVol 1,832M
52wk Highs   97
52wk Lows   385
TRIN        1.06
PUT/CALL    0.77


If you are a bull you should have a headache from bouncing off
8000 several times. The Dow tried hard to make it two in a row
and succeeded. The Nasdaq did not go along for the ride and
finished negative for the day. This divergence was due to more
negative remarks on the tech sector conflicting with positive
economic reports.

Dow Chart

Nasdaq Chart

The day started out with a better than expected Jobless Claims
report with only 406,000 new claims compared with estimates of
425,000. However the prior week was revised up again to 430,000
from 424,000. This was the fifth week over 400K. This pause in
the rise encouraged traders but I believe it is only temporary.
The continuing claims numbers rose again and when matched
with the Help Wanted Index today they should continue to rise.
The Index fell to .41 and its lowest reading in decades. Layoffs
may be slowing but nobody is hiring. This means the Oct Jobs
Report next week could be very bad. With job ads the lowest since
the 1960s the outlook for continued consumer spending is negative.

Durable Goods Orders came in much better than expected with a
decline of only -0.6% instead of -2.6% as expected. This number
is highly volatile and the loss evens out the +8.6, -4.5 numbers
for the last two months. This encouraged the markets on the
surface but because of the volatility there will need to be
confirmation next month.

The best news for the day was the New Home Sales, which soared
to record highs at an annualized 996,000 pace. Sales in August
were up +1.9%. However, like most government numbers recently,
the past monthly records for May, June and July were all revised
downward again. Reports from readers from different areas of the
country indicate that builders are pulling out all the stops to
blowout new houses quickly and reduce inventory levels. Builders
are scared that interest rates will turn up once the stock market
turns up and they do not want to be caught with a lot of inventory.
California is the only area that has reported a continued demand
for new homes and only those well under $1 million. With winter
coming and inventory being rushed to completion the numbers in
November will be significantly less. Also, remember that many
houses are sold before they are built and/or completed. That
means many of the sales could have been contracted months ago.
Also, with the rate of foreclosures at a 30 year high there are
a lot more "distressed" houses on the market. This will also
lower the number of new houses sold.

Friday will be another opportunity for economics to move the
markets. The Q2 GDP will be announced at 8:30 but this is not
expected to be a big miss. The estimates are for +1.1% growth.
This is a historical look back at the Q2 timeframe and not
relative to the current situation. The final Consumer Sentiment
for September will also be announced. This is the second look at
these numbers and there is not likely to be a big drop below the
previously announced 86.2%. Neither of these reports are expected
to be surprises and that makes them dangerous. If we get a surprise
then the market should react accordingly.

The earnings picture today was mixed. GE led the parade by affirming
estimates for the eighth time this year. Shorts covered and the Dow
headed for 8000. During the conference call the CFO admitted that
the improvement in short cycles businesses had stalled and the
plastics business was suffering. Also, they were losing money in
GE Equity and their reinsurance group GE RE. The $350 million loss
would be made up by a one time gain of $300 million from the sale
of another unit. Making up a three cent shortfall in operations
with a one time gain is not something that encourages traders. This
was the same as a three cent warning and the stock tanked. They
declined to give guidance for 2003 because the economic conditions
were much tougher than they expected and they wanted to wait until
early December before changing estimates. This was not accepted
well by the market. GE fell from $28 to below $26 in after hours.
GE Capital said it was going to file to sell $50 billion in bonds
and estimated that would get them through the first half of 2003.

Phillip Morris chose the news of a favorable court ruling and +1.26
gain in the stock to announce a serious earnings warning after the
close. The company said 2002 earnings would now be in the range of
+3% to +5% growth vs the +8% expected. They also said it would carry
over into 2003 earnings as well. Lower volumes and higher costs were
given as the reasons. The stock dropped to $37.75 in after hours, a
-$5 drop from the close. MO is a Dow component.

Another Dow component, SBC announced after the close that they were
going to cut another 11,000 jobs with the majority in the 4Q. They
said they were slashing capex spending for 2003 to only $5 billion
from the 2002 rate of $8 billion. SBC has lost three million retail
access lines so far in 2002 and revenue dropped -$1 billion in the
first half. The company said it would take major charges against
earnings in both the 3Q and 4Q. This capex news will hit the already
dying network sector with another round of estimate cuts.

RBAK warned earlier in the day that it was experiencing an unusually
difficult quarter and would post almost double the loss that analysts
were expecting. Nortel also warned again that it would miss estimates
for the 3Q. LU, CIEN and TLAB have also warned recently.

After the bell COGN beat estimates by a penny and affirmed guidance
that was roughly inline with estimates. MANU also beat by a penny
but announced that its president was leaving and they would be
cutting -10% more jobs. LBRT announced earnings that fell in the
midrange of their previous warning. They said they cut another 110
jobs and warned that earnings for the next quarter would be well
below estimates. They said the market had fallen off much more
quickly than anticipated during the quarter. SLR announced a loss
that was inline with estimates but said they were taking -$2.6
billion in charges. They lowered guidance for this quarter to as
much as a -3 cent loss and lower from estimates of a penny loss by
analysts. They said they were experiencing a difficult market for
all types of electronics. No kidding?

The positive economic reports helped the Dow move back to the 8000
level but window dressing and short covering failed to hold above
it. This is critical for maintaining any rally. While I expect
the Dow to start off in the cellar tomorrow there is a strong
possibility that we could see a rebound before the day is out. The
problem is the generally low prices of stocks. Many funds have
fixed asset allocation values and with the monster bond run of
late there could be some asset allocation moves necessary before
the end of the month. This means they have to sell bonds and buy
stocks to bring the ratios back into balance. How much this may
impact the markets is hard to tell. Most of the buying/shifting
could already be over since very few funds shift money on Fridays
and Monday exposes their plans to more event risk. Better to bite
the bullet this week and get it out of the way. The strong volume
the last two days would bear out this premise.

This is setting Friday up as an explosive day. A downdraft at
the open based on problems with GE, MO and SBC followed by any
early morning moves by institutions squaring the quarter books.
The morning volume is going to be heavy and the market direction
by days end will be anybody's guess.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

Check out the Traders Corner "Charting Gaps" by
Leigh Stevens in tonight's newsletter.


Pinball Wizard

Good background music to have had on today if you were a QQQ
trader was Pinball Wizard by The Who as the Q's bounced around
our retracement bracket like a steel ball, with lights flashing
on trader's terminals if set at our $22.21 level of resistance
and $21.44 level of support.

"He's a pinball wizard
There's got to be a twist
A pinball wizard
He's got such a supple wrist...."

Whether you're a bullish trader in the Q's or a bearish one, or a
"true trader" that was willing to flip the paddles, the "ball" is
still in play and the 60-minute chart shows that the 21-hour and
38.2% retracement are perhaps "in play" as support, while the 50%
retracement at $22.21 is near-term resistance.

Don't let last night's Index Trader Wrap and "look for bullish
entry near $21.45, with a target near $22.75, stop $20.75" and
today's market monitor comments at 10:19:28 for bears to be
looking for entry at $22.19, stop $23 and target $20.20.

By then end of today's session, both bulls and bears in the QQQ,
which closed at $21.60 -1.23% were running a "dead heat."

NASDAQ-100 Index Tracking Stock (QQQ) - 60-minute interval

I couldn't "resist" profiling the Q's as a short trade this
morning as the Networking Index (NWX.X) 92.67 -4.6% saw selling
at the open as did the Semiconductor Index (SOX.X) 248 -3.15.  A
quick check of the Biotechs (BTK.X) 329 -1.03% and Software
(GSO.X) $86.25 -1.65% both opened higher, just like the Q's, but
they too began to fade, almost as if the weakness in the
networkers and semiconductors were giving bulls second thoughts.

Current analysis is that technicals on the 60-minute chart is
looking striking similar to the September 11th close, but perhaps
a little weaker as the 50-pd SMA is still trending lower, while
the September 11th close would have had the 50-pd trying to
flatten out.  Note how the 21-pd SMA (pink) is still in play as
we pointed out last night.  That was our bullish entry point for
QQQ bulls today.

Tonight, I've placed two (2) short-term upward trend (green) to
give traders a perspective of the September 12th open and
possible action tomorrow.  If the Q's break below current trend
($21.44) and close below that level, then I become more bearish
and begin targeting new lows near $20.20 and 19.1% retracement.

I'm leaning toward the bearish side here, but still rather
"neutral" since the QQQ is in the range of retracement between
$21.44 and $22.21.  As such, a bearish trader may want to tighten
down a stop from $23.00 to $22.65 if your more risk averse, while
a QQQ bull that did step up to the plate near $21.44 retracement
and rising 21-pd SMA, can tighten up a stop just under today's

My thinking here is that a break much below today's low is going
to have MACD on the 60-minute time interval crossing below its
signal (MACD=0.06 / Signal=0.04) and if skeptical bulls (like me)
pull the plug, then MACD breaks its zero level, which is BEARISH
for this indicator.  I have my MACD settings at (12,26,9).

Stochastics actually gave some decent signals today on the 60-
minute interval, but I think the QQQ will be hard pressed to get
much above the $22.21 level unless some big tech makes an
announcement soon, like before tomorrow's opening bell.

NASDAQ-100 Index (NDX.X) - Daily Chart

The daily interval chart of the NASDA-100 Index (NDX.X) itself is
also rather range-bound, but I think lower.  Premiums are
"jacked" up and on a daily basis, most of the action in October
strikes looks to be from the speculators in the out-the-money.
The October 900 puts (NDKVR) were bid/offer $54.20/$62.20, and a
trader that could get filled near $58 could play short.  However,
with higher premiums at risk, I'd use a protective stop at 915 to
begin with.  The October open interest is heavies on the put side
in the 825 (NDKVG), which has me calculating potential monthly
support near 801, where 800 may be a "psychological" target or
monthly support.  If looking put, then $58 is simply too much to
risk in my book.  If the NDX trades 815, the 900's would trade
$85 on an expiration close of 815.  A bear taking the NDX put,
would want to see some type of close below 857 in the next couple
of sessions is my thinking.  Again... premiums are high.

Dow Diamonds Chart (AMEX:DIA) - 60-minute interval

The Dow Diamonds (AMEX:DIA) $79.81 +1.46 did hit my bullish
target of $80.00 early this morning.  From yesterday's market
monitor bullish profile of $77.70, I did "lift" my target ahead
of this morning's new home sales data, but followed with a stop
at $78.98, just in case the housing numbers were "blow out" and
might find the Dow jumping above $80.45.  That wasn't the case,
and traders may have been stopped out at $78.98 at around 01:25
PM EST.  However, the Dow held tough and actually came back and
pierced the session high, with the Dow Industrials briefly
breaking the 8,000 psychological barrier and trading a session
high of 8,012.29.  If traders are holding long, would continue to
hold, but would follow with a tighter stop, just under the rising
21-day SMA.  Concern near-term is that technology components are
going to weigh things down.

One thing I noticed today, but passed on was early weakness in
Hewlett Packard (HPQ), which really seemed to have IBM reversing
lower.  Concern becomes that further tech weakness (like QQQ)
will act like a cancer, eat away at HPQ and IBM, then further
spill over to the market and have the Dow softening up.

Also impacting the Dow Industrials tomorrow morning will be Dow
component Philip Morris' (NYSE:MO) $42.73 +3.01% warning on
earnings.  In yesterday's 03:15 PM EST intra-day update
 I actually highlighted a bearish play in "big MO" with a 1/2
position put.  In Redibook ECN trading, shares of MO were getting
pounded lower at $38.80.

Now, while the MO lower trading will weight on the DIA and INDU
performance at the open, I'm not immediately thinking this is an
"economic" type of earning's warning as "tobacco" is almost in a
world of its own.

I don't think Dow action is really going to be driven by MO, but
more by technology stock trading.  If tech starts getting hit
lower, then it will be a bull's psychology that then gets damaged
and will bring more sellers to the Dow.

We discussed last night that the REASON a bullish index trader
wanted to stick with the DIA, SPX and OEX, wasn't necessarily for
the LARGEST potential gain, but to try and AVOID as much risk as
possible.  Hopefully, traders learned something today that
trading isn't all about "potential gain" but "potential loss"
under a more uncertain market environment.

Bears can short/put the Dow on tech weakness, but stop most
likely goes just above DIA $80.50 or Dow Industrials (INDU)
8,050.  On such a move, technology bears may want to be on the
alert, as bullishness in the Dow tends to lift a market's spirit.

Option traders most likely find high premiums in the Dow too.  My
thinking is... "If I'm going to pay up on premium in puts, then I
might as well stick to tech weakness."  I'm also thinking, if the
Dow loses it to the downside, then it will probably act like a
sledge hammer and drive tech lower.

S&P 500 Index / S&P Banks Index - Daily Chart

Don't think there might not still be some "asset allocation"
taking place.  Banking stocks did will today and helped provide
bullishness in the SPX and OEX.  I've tried to show both the SPX
(upper) and S&P Banking Index (BIX.X) (lower).  An SPX break
above 857 could bring on an SPX rally near 879, but I'd correlate
any type of bullishness with the BIX.X on a move above 283 and
potential test of its 21-day and 50-day SMAs as formidable

If that were to take place, (BIX.X rallying further to 315 and
SPX close to 878) I'd sell bullish positions into strength.
Bears can look for entry points above 857, but monitor tech for
weakness.  If the NDX were breaking below 855, then a lower risk
short/put in the SPX, SPY is at hand.

S&P 100 Index / Retail HOLDRS - Daily Interval

In our September 15th wrap 


 we were monitoring a bearish trade in the SPX and OEX as it
relates to the retailers as depicted by the RTH.  At that time,
we thought SPX and OEX bears wanted the RTH to find resistance
below $84.50 and for them to break trend and help drive the SPX
and OEX lower.  Well, that certainly happened.  Not how the RTH
is still relatively STRONG and now challenges its 50-day SMA.  If
the RTH finds resistance at current levels or $80.00, then I'm
expecting weakness to follow in the SPX and OEX.

Note how the "old" downward trend that I've extended actually has
served as "bearish support."  Bearish support is a downward trend
(kind of like the lower end of downward trending regression).
Often-times, institutions that are net short a stock/sector will
"leg out" of some bearish positions at bearish support, but look
for rally's to short back into.  Only after a level of resistance
is broken, will they then begin to get more aggressive with
short-covering and eventually, a bullish trend takes hold.

As such, I'm thinking that market participants that "know
something" about pending weakness would be looking to short the
RTH or sell strength somewhere between 80-83.  So far, that's
been a profitable strategy.

An OEX and/or SPX trader currently long, may want to "correlate"
the RTH and BIX.

If you're a bull, you want to see BIX and RTH strength.  If you
don't, then most likely that's the sign to cut out of bullish

For bears looking for bearish OEX and SPX, you know that you're
looking for RTH and BIX weakness at levels of identified

While it is always helpful to be able to watch things intra-day,
I don't think a trader necessarily has to.

If waiting for a bearish entry point right now, I do think a
trader can wait until tomorrow's trading plays out.

Tomorrow, we'll get the FINAL Q2 GDP numbers.  Economists are
expecting "no change" from the preliminary 1.1% growth.

Final Thoughts

I'm more "bearish" toward technology, thus would prefer a first
bearish play in the QQQ's or NDX.X.  I've talked enough about not
liking to pay "jacked up premiums," but sometimes a trader has to
deal with what the market gives.  I would prefer shorting, but a
trader that does that needs to be disciplined with stops.

As such, looking bearish the Q's.  A trader that is "risk averse"
can follow a QQQ bearish trade with a stop just above today's
high of $22.33 (say $22.45) while a trader that is trading the
levels can start out with $23.00.  Look for further weakness on a
break of today's low.  If anxious to get short prior to breaking
of today's low, then would limit to partial positions at first.
Just in case banks and retailers drive bullishness and have QQQ
bears looking for cover.

If tech weakens, then monitor banks and retailers for resistance.
If they're finding it at levels discussed, the SPX, OEX and DIA
bulls may want to move to the sidelines and look for bears to
begin searching for some up-ticks.

Option traders that are "more aggressive" on the bearish side of
DIA, SPX and OEX declines, and finding some resistance levels
intraday, might be able to get some option entry "in between"
bids and asks of options.  If things are trading somewhat
sideways, no sense paying the offer if you can work a trade in

Jeff Bailey

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Anything else is too slow!



Window Dressing
by Steven Price

The rally continued today, on the heels of some positive economic
data.  The rolling average for initial jobless claims finally
dropped slightly, after seven straight weeks of increases. The
four-week average decreased by 1,000 to 419,000, due to a drop of
24,000 claims last week.  This sounded promising, until SBC
Communications announced after the bell that they would be laying
off 11,000 workers.  This follows the 10,000 positions it has
already eliminated this year.  SBC said it lost 3 million retail
access lines, its worst decline ever, leading to more than $1
billion in losses in the first half of the year. The company said
it could lose $2.3 billion in sales over the next four quarters
at the current pace.

This news was followed by a profit warning from Philip Morris.
Big MO said its 2002 earnings would increase only 3 to 5%, a far
cry from analyst estimates of 19%.  The stock closed at $42.73,
but traded as low as $38 after hours. The company cited lower
than expected sales and higher promotional spending.  As a Dow
stock, MO should weigh heavily on the average in the morning.

Durable goods orders fell 0.6% in August.  While this is negative
overall, it is far less than the predictions of a 2.7% decline.
Core capital goods orders were positive year-over-year for the
first time since November 2000.

We also got some good news on new home sales. Sales rose 2% in
August, to a record annualized rate of 996,000 units, in spite of
a drop off in existing home sales, and record foreclosure rates.

While the Dow tacked on 155.30 points, to close at 7997.12, it
was repeatedly turned back on each venture over the 8000 mark.
This can be viewed in two ways.  The failure under 8000 can be
seen as bearish, as it was unable to hold a significant round
number.  The break above 7900 can also be seen as bullish, since
it walked its way down 100 points at a time and has now taken a
couple of steps back up the last two days, in similar increments.
However, after Philip Morris' warning, my guess is the former
will prove more accurate.  At the same time the Dow was chugging
along, the Nasdaq actually lost some ground, falling less than a

The Semiconductor Index (SOX) had mounted a terrific rally from
its intraday low of 231 on Tuesday, to close at 255 on Wednesday.
The group gave back 8.10 today to finish back at 248.35.  Without
much good news outside of the cell phone group, the rally
appeared to be a compression bounce, after the index had lost 35%
in a month.

The SBC warning is in sync with the warning last night from
Nortel, which said revenue would fall 15% sequentially, 5% worse
than previously forecast.  The telecom equipment manufacturer
took a hit as Nortel blamed the losses on major customers'
reluctance to spend.  Nortel announced a reverse stock split, as
it attempts to avoid being de-listed.  The sentiment was echoed
by telecommunications equipment maker Redback, who said today
that deteriorating spending by telephone company customers would
mean lower revenue.  The whispers are now starting about Cisco,
which derives 20-25% of its revenue from the telcos.

The rally of the last two days has given the bulls something to
hang their hats on, as we bounced from July's lows, in what some
see as a double bottom formation.  However, the bullish
percentages of the broader indices paint a different picture.
The Dow's bullish percentage, which shows the percentage of
stocks in the index that are currently giving point and figure
buy signals, is down to 16.7%, from a recent high of 60%.  The
S&P 500 has fallen from 56% to 30.8%.  The Nasdaq 100 has fallen
from 58% to 22%.  Each of these is in a bearish column of "O"s
and would require a 6% reversal to signal a turnaround.  Until
that happens, it is hard to buy into a rally.

Look for tomorrow to re-test 7900 to the downside in the Dow,
after Philip Morris' warning.  However we will also be seeing the
GDP and University of Michigan Consumer Sentiment numbers, which
will have a big impact.  If GDP comes in below the 1.1%
consensus, we may even re-test Tuesday's 7683 close.


Market Averages


52-week High: 10679
52-week Low :  7532
Current     :  7997

Moving Averages:

 10-dma: 8039
 50-dma: 8433
200-dma: 9549

S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  854

Moving Averages:

 10-dma:  856
 50-dma:  887
200-dma: 1040

Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  843
Current     :  873

Moving Averages:

 10-dma:  880
 50-dma:  935
200-dma: 1255


The Semiconductor Index (SOX.X): The semis rallied convincingly
on Wednesday, only to see the magic wear off on Thursday.  After
trading as low as 231 on Tuesday, they hit an intraday high of
261 on Wednesday.  Unfortunately, today's drop of 8.10 put the
group back under 250, closing at 248.  The question is whether
Wednesday's rally was just a dead cat bounce.  If the group can't
bounce back again, it is likely that we will see a re-test of 230
once again.  With news of layoffs from SBC after the close and a
warning from Philip Morris', it is likely that the whole market
will be dropping on Friday.  The SBC news underscored warnings
from Redback and Nortel, which cited a lack of spending by
telecoms.  Whispers are already beginning that Cisco may be
seeing poor results ,as well, since they derive 20-25% of their
revenue from the telecoms.  While these are not chip stocks, they
will most likely give the Nasdaq a push downhill, which should
take the SOX with it.

52-week High: 657
52-week Low : 236
Current     : 248

Moving Averages:

 10-dma: 255
 50-dma: 307
200-dma: 466


Market Volatility

The VIX dropped a couple of points on today's rally.  However, it
still remains over 40, which is considered high.  It is also
worth noting that it found support at its 50-dma of 39.62,
although this is not as significant as it is in a stock, since
the index is derived from the volatility levels of 8 different
OEX options. The fact that it remains over 40 after a gain of
over 300 Dow points in two days, shows that traders are not yet
convinced that the rally is for real.  If the Dow can close back
over 8000, I expect to see a drop under 40.  If we re-test the
7532 level, we could see the 50 level again quickly.

CBOE Market Volatility Index (VIX) = 40.12 –2.29
Nasdaq-100 Volatility Index  (VXN) = 59.09 +2.40


          Put/Call Ratio  Call Volume   Put Volume

Total          0.77        612,736       473,856
Equity Only    0.58        508,595       295,508
OEX            1.16         18,647        21,689
QQQ            0.45         56,714        25,325


Bullish Percent Data

           Current   Change   Status
NYSE          34      + 0     Bull Correction
NASDAQ-100    22      + 1     Bear Confirmed
Dow Indust.   17      - 3     Bull Correction
S&P 500       31      + 0     Bear Confirmed
S&P 100       25      + 0     Bear Confirmed

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

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


 5-Day Arms Index  1.20
10-Day Arms Index  1.47
21-Day Arms Index  1.48
55-Day Arms Index  1.30

Extreme readings above 1.5 are bullish, and readings below .85
are bearish.  These signals don't occur often and tend be early,
but when they do, they can signal significant market turning


Market Internals

        Advancers     Decliners
NYSE       2026           724
NASDAQ     1714          1423

        New Highs      New Lows
NYSE         36              22
NASDAQ       51             185

        Volume (in millions)
NYSE     1,891
NASDAQ   1,650


Commitments Of Traders Report: 09/17/02

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.

S&P 500

Commercials Increased long positions by a whopping 50,000
contracts and shorts by 33,000.  Small traders followed suit with
large increases, but leaned toward short position increases more

Commercials   Long      Short      Net     % Of OI
08/27/02      425,982   469,087   (43,105)   (4.8%)
09/03/02      431,755   468,529   (36,774)   (4.1%)
09/10/02      426,230   470,537   (44,307)   (5.0%)
09/17/02      476,224   503,268   (27,044)   (2.7%)

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year: ( 36,481) - 10/16/01

Small Traders Long      Short      Net     % of OI
08/27/02      153,152    72,408    80,744     35.8%
09/03/02      158,262    80,130    78,132     32.8%
09/10/02      166,696    85,259    81,437     32.3%
09/17/02      182,243   116,377    64,866     21.7%

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


Commercials increased long positions by 35% and shorts by 29%.
Small traders increased longs by only 1,000 contracts, but
increased short positions by 4,000, or 34%

Commercials   Long      Short      Net     % of OI
08/27/02       45,354     50,634    (5,280) ( 5.5%)
09/03/02       46,712     53,287    (6,575) ( 6.6%)
09/10/02       53,309     58,745    (5,436) ( 4.9%)
09/17/02       72,522     75,815    (3,293) ( 2.2%)

Most bearish reading of the year: (15,521) -  3/13/02
Most bullish reading of the year:   9,068  - 06/11/02

Small Traders  Long     Short      Net     % of OI
08/27/02       10,156     8,040     2,116    11.6%
09/03/02       11,150     7,720     3,430    18.2%
09/10/02       14,024    10,494     3,530    14.4%
09/17/02       15,288    14,142     1,146     3.9%

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


Commercials increased their long positions by 4,000 contracts,
while increasing shorts by 7,000.  Small traders increased longs
by 6,000 contracts, almost doubling the position, while
increasing shorts by only 1500, or 15%.

Commercials   Long      Short      Net     % of OI
08/27/02       21,023    14,328    6,695      18.9%
09/03/02       21,161    13,792    7,369      21.1%
09/10/02       22,946    14,936    8,010      21.1%
09/17/02       26,863    21,187    5,676      11.8%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
08/27/02        6,825     8,438    (1,613)   (10.6%)
09/03/02        6,395     7,966    (1,571)   (10.9%)
09/10/02        7,568    10,129    (2,561)   (14.5%)
09/17/02       13,393    11,637     1756       7.0%

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   1,909  -  1/16/01


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Ed Choi/Richard Dahlberg: GMO Pelican Fund

Ed Choi and Richard Dahlberg are co-leaders of Grantham, Mayo,
Van Otterloo & Company's U.S. Active Team, and co-managers of
Pelican Fund (PELFX), GMO's only "retail" mutual fund product.
The minimum investment for the GMO Trust retail fund, Pelican
Fund, is $5,000 for regular accounts ($1,000 for IRA accounts).
There is no minimum for subsequent investments.

All GMO Trust mutual funds, except for the Pelican Fund, are
"institutional" mutual funds and require a $1 million minimum
initial investment.  GMO Trust's retail fund product, Pelican
Fund, is similar in style/strategy to the GMO Value Fund, the
flagship product of GMO's U.S. Active Division.  Both "value"
products seek to outperform the Russell 1000 Value Index over
time (with less risk than the market in Pelican Fund's case).

Richard A. Mayo, a founding partner of the firm, ran the GMO
Pelican Fund from its June 1989 inception until December 2001.
Effective January 2002, Ed Choi and Richard Dahlberg took over
the day-to-day management of the fund.  Ed Choi is a longtime
member of GMO's U.S. active team.  He contributed to Pelican
Fund's strong long-term record.  Dahlberg is a seasoned fund
manager who previously managed portfolios for Pioneer, Salomon
Brothers, and MFS.

At $90 million in assets, GMO Pelican Fund is relatively small
and comprises just a small portion of Grantham Mayo Otterloo's
$20 billion today in total assets under management.  This fund
has limited brokerage availability, but if you have an account
with Fidelity, Pelican Fund is available through their retail
funds network.  Like Fidelity, GMO is headquartered in Boston.

Founded in 1977 on the philosophy of conservative value-driven
investing, GMO has grown to become a top global money manager,
with offices in London, Sydney and San Francisco, and employing
some 200 people worldwide.

The same year (1977), a permitted, not-for-profit tax-deductible
organization called The Pelican Fund was founded, when the Brown
Pelican was on the endangered species list.  GMO Trust's Pelican
Fund (PELFX) was launched in June 1989, more than a decade later.

Manager Background

GMO Trust's Pelican Fund is managed by the U.S. Active Division
of Grantham, Mayo, Van Otterloo and Company.  Choi and Dahlberg
manage the portfolio assets, and are supported by four research
analysts and a half dozen trading/operating people.

Ed Choi (left) co-leads the U.S. Active team with
Richard Dahlberg.

Prior to joining GMO in 1994, he worked in the
Equity Research Department of Furman Selz, Inc.

Choi has a B.A. in Applied Mathematics from Brown

Dahlberg (left) co-leads the U.S. Active team with
Edmond Choi.  Prior to joining GMO in 2001, he was
head of the core value group at Pioneer Management
Company.  Before that, he was a managing director
and senior portfolio manager with Salomon Brothers
Asset Management.

Dahlberg earned his B.S. Finance from Northeastern
University and his M.B.A from the Wharton School.

Since Richard Mayo stepped down, Choi and Dahlberg have assumed
the portfolio management responsibilities.  However, the fund's
prospectus says that no one person is primarily responsible for
making recommendations to the fund.  In the next section, we'll
take a closer look at the investment philosophy and process GMO
applies on the GMO Pelican Fund.

Investment Overview

GMO Pelican Fund seeks long-term capital growth; current income
is secondary.  It invests primarily in securities traded in the
United States, but may have up to 25% of fund assets in foreign
securities.  Choi and Dahlberg invest mostly in domestic common
stocks representing outstanding values relative to their market

Under normal conditions, the GMO U.S. Active division looks for
companies with low price valuations and rising earnings.  Their
primary focus is on established, financially secure firms, with
market capitalizations of more than $100 million.  According to
Morningstar, the Pelican Fund has a large-cap value orientation,
while in Lipper's system, the fund is categorized as "multi-cap"

GMO's U.S. Active team evaluates stocks using a combination of
fundamental and quantitative research.  The investment universe
consists of the largest 1000 U.S. companies and is constructed
utilizing a proprietary dividend discount model (DDM) to identify
the best values in the marketplace and to screen for inexpensive
stocks.  Traditional fundamental analysis is then applied to the
securities in each sector to validate compelling opportunities.

Choi, Dahlberg and team look at the following characteristics in
companies: unexpected earnings power or growth rate; situations
where profitability can be improved; undervalued assets; and/or
situations where a stock's price has suffered due to a perception

The GMO website goes on to say that the team builds the portfolio
stock by stock.  Risk is controlled primarily through "valuation"
since all securities are purchased at a "discount to fair value."

Stocks are sold when they become fully valued, or to take price
risk out of the portfolio by cycling into more deeply undervalued
opportunities, the website states.  The team also utilizes money
market (cash) or fixed income instruments to limit risk and await
better equity valuations.

Per Morningstar's latest fund report, GMO Pelican Fund possessed
a median market capitalization of $11.8 billion, less than half
that of the average large-cap value fund ($24.4 billion).  Giant
and large capitalization stocks composed of nearly 55% of assets;
mid-cap stocks represented 31.5% of assets; and small/micro-caps
comprised almost 14% of stock holdings.  So while Pelican Fund's
overall bias is large-cap, you can clearly see that it really is
"multi-cap" oriented (Lipper's fund classification).

Both Morningstar and Lipper agree that the fund has a value bias
as represented by the fund's average price valuations, which are
right on par with the large-cap value category average.  Pelican
Fund's average P/E of 24.2 is very close to the category average
(23.9).  In the next section, we see how well the fund has fared
this year and over time relative to similar funds.

Investment Performance

Because GMO Pelican Fund follows a conservative, value oriented
approach, you would expect it to have below average risk versus
its peers, and it does.  Morningstar rates the fund's risk over
all trailing periods (3-year, 5-year, 10-year) as being "below
average" in comparison to other large-cap value funds followed.

In Lipper's system where funds are compared to their broad peer
group over the trailing 36-month period, Pelican Fund holds the
fund tracker's highest rating for preservation ("Lipper Leader")
in down markets.  For the trailing 3-year period as of September
25, 2002, the fund produced an average loss of just 2.1% a year,
ranking it in the top 14% of the large-cap value category using
Morningstar's data.  For the same period, the average large-cap
value fund declined by a 6.1% annual-equivalent rate, while the
broad U.S. market as measured by the S&P 500 index lost 11.9% a
year on average.

Since Choi and Dahlberg took over the portfolio management reins
at the start of 2002, Pelican Fund has slightly trailed its peer
group.  According to Morningstar, the fund has declined 25.4% so
far in 2002, ranking it in the category's 68th percentile (third
quartile).  That's too soon to make any meaningful judgements as
to Choi/Dahlberg's relative performance, and considering Ed Choi
contributed to the fund's fine long-term record, there isn't any
reason to panic at this point.

Over the long term, Grantham Mayo Otterloo's conservative, value
conscious approach has been proven to produce the desired "above
average" return and "below average" risk profile that all people
want.  As of August 31, 2002, GMO Pelican Fund had an annualized
total return of 11.5%, a 1.3% return advantage to the market (as
measured by the S&P 500 index).  The fund's trailing returns for
the 3-year, 5-year and 10-year period all rank in the top 20% of
the large-cap value category, per Morningstar's report.

How well has the fund fared relative to its benchmark index, the
Russell Value 1000 index?  Since fund inception (June 1989), the
Pelican Fund has an average return of 10.5% versus 11.1% for the
Russell Value 1000 index.  That does not represent "significant"
underperformance of the benchmark.  The fund has been successful
in terms of limiting risk, however, producing less risk than the
benchmark Value 1000 index and the broad S&P 500 index.


GMO Pelican Fund's relative performance in 2002 might not be top
quartile, but given the experience of GMO's U.S. Active team and
the offering's fine long-term track record, there's reason to be
optimistic about the fund's long-term prospects.  Investors that
seek a conservative value-conscious approach to long-term growth
of capital have a decent choice here.  A no-load cost structure,
and low 0.75% expense ratio, add to its appeal.

As mentioned earlier, there's no discounting that Grantham, Mayo,
Van Otterloo and Company, LLC is one of the leading global money
managers today with $20 billion in assets under management.  The
firm has built its reputation on the institutional side, but you
can have access to the firm's strong quantitative and fundamental
research capability through the GMO Pelican Fund, the firm's only
retail fund product.

For more information or a fund prospectus, go to the www.gmo.com

Steve Wagner
Editor, Mutual Investor

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Mixed Messages?

GE affirmed estimates, then they affirmed that business was
terrible. Phillip Morris brags about court win then admits serious
earnings problems. This bipolar news produced bipolar markets with
the Dow strongly positive and the Nasdaq fighting to hold zero.

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Contact Support
The Option Investor Newsletter                 Thursday 09-26-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Stock Picks: Reversal of Fortune - RFMD
Dropped Calls: None
Dropped Puts: MAR, AIG
Daily Results
Call Play Updates: ABT, LLL
New Calls Plays: None
Put Play Updates: BGEN, BSC, FISV, CI
New Put Plays: GM, TECD


Reversal of Fortune

RFMD - RF Micro Devices - $6.25
Strategy: Long Stock with put insurance

While most chip companies have repeated the mantra that capital
spending is still dropping and therefore have lowered their
revenue and earnings guidance, there are a few pockets of IT
spending that show promising signs.  The cell phone market is one
of them.

The first positive signs showed up last week, when Qualcomm
raised its shipping targets for the current quarter from 19
million to 20 million cell phone chips, citing strong demand.
They also said that they expect to ship significantly more next

RFMD, which is also engaged in the wireless business, echoed this
sentiment when it raised its guidance for the current quarter.
Demand is picking up, as revenues will exceed the previously
forecasted $109-$114 million range and come in around $118
million.  Earnings per share were raised from $0.01-$0.02 to
$0.03.  While two cents is not a tremendous rise, it is still
three times the previous forecast and represents a significant
percentage increase.   The company also commented that order
visibility for next quarter continues to improve.

The fact that the company has reversed its earnings trend after
finding a bottom in June of this year is also promising and lends
credence to statements of business picking up again.

RFMD's CEO said, "Our customer and product diversification
efforts are paying off. We are experiencing broad-based strength
across multiple customers and markets, which is increasing our
capacity utilization and improving our order visibility into the
December quarter. The Company currently has production orders for
the December quarter to support sequential revenue growth beyond
the increased September estimates provided today."

The company currently holds $344.2 million in cash, which amounts
to 47.2% of its assets.  It also has a positive P/E ratio, which
is hard to find in the sector.  The P/E is certainly high at 103,
but quite a bit lower than Qualcomm's P/E of 191.

Qualcomm announced on Wednesday that it is seeing an increase in
its bookings, as well, which is a positive sign, as the book-to-
bill ratio in the chip sector has been steadily declining.  This
is just more evidence of a possible turnaround in this sector
within a sector.

On Thursday, J.P. Morgan, citing greater customer diversification
and strengthening end demand, upgraded RFMD. A recent Lehman
Brothers research note said mobile phone sales across Europe are
also likely to pick up in the fourth quarter, as consumers
upgrade to handsets with color screens. Morningstar currently
rates RFMD's growth potential as "A," while rating Profitability
and Financial Health as "B."

While the chip sector still faces strong challenges from a lack
of IT business spending, the mobile phone business is showing
some tangible signs of a turnaround.

The stock recently found point and figure support between $5.50
and $6.00, testing these levels repeatedly.  RFMD finished the
day at $6.25, after trading as high as $6.80.  The 50-dma is
$6.85 and conservative traders can use a trade above this level
as a trigger point.  We also recommend the purchase of the Feb 5
put (RFZ-NA) as downside protection, in case the upturn in the
industry stalls.  Purchasing the put, which expires in February,
will provide time for the fourth quarter predictions to play out.
The stock has resistance at $8, $9 and $10, but the February time
frame should give the stock enough time to show evidence of a
turnaround and take out at least one or two of these levels.  If
it cannot cross $8 by February, then closing the play may be

Option 1: Purchase RFMD at the current price, or when it crosses
the 50-dma.  Purchase 1 put for every 100 shares of stock.  If
the stock cannot cross resistance at $8 by February expiration,
close the position.

Option 2: If RFMD drops below $5 by February expiration, collect
the profit on the put and lower the cost basis of the stock

Option 3: If RFMD drops below $5 at any point between now and
February expiration, sell the put, which should still have some
time premium left in it and sell the stock.

*Note the total potential loss on the play is the difference
between the purchase price of the stock and the $5 strike price,
plus the cost of the option.


When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.




MAR $31.10 +2.90 (+2.50 for the week)  A report in this morning's
Wall Street Journal said Marriott was the target of short
sellers, who were raising questions about the quality of the
company's earnings and accounting practices.  Yesterday the
company affirmed their third quarter earnings, which may have
forced those short sellers to cover, as the predictions didn't
pan out.  Although some of the top hotel companies came out
yesterday and said business in the quarter had been weaker than
expected, Marriott said it was on target, bucking the trend.
Regardless of the reason, the rally in the stock was strong
enough to break the trend we were attempting to capture.  We will
close the play and spend our put money elsewhere.


AIG $58.00 +2.44 (+1.65) Thursday was a stellar day for the
Insurance stocks, with the IUX index staging a nearly 4% advance
by the closing bell.  Our AIG play gapped higher in the morning,
and after twice testing the $56 level as support, the stock
rallied to close right at its high of the day on solid volume.
While our expectation is still for more downside in AIG, we have
to stick with our discipline and drop AIG tonight due to the
strong relative performance and the close right at our $58 stop.
Use early weakness tomorrow to exit open positions at a more
favorable level.


Please view this in COURIER 10 font for alignment

CALLS              Mon    Tue    Wed   Thu   Week

ABT      41.90   -0.11   0.40   1.30 -1.90 Tested Support
LLL      56.15    1.10   0.69  -0.91 –0.94 Trend in tact


AIG      58.00   -0.70  -1.26  0.91  2.44 Drop, stopped
BGEN     30.40   -1.35  -0.31  0.76  0.06 Competition strong
BSC      57.92    0.39  -1.21  0.07  1.00 Sector problems
CI       73.90   -0.98  -2.04 –0.80  2.70 Entry point
FISV     28.78   -0.62  -0.99 –1.07  0.68 Gap Filled
GM       41.52   -0.97  -2.73  1.39  1.95  New, Debt probs
MAR      31.10    0.09  -0.70  0.17  2.90  Drop, reaffirmed
TECD     28.38   -0.75  -0.28  0.51 –1.64  New, breakdown

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ABT $41.90 -1.90 (+0.10 for the week)  Abbott received a
downgrade this morning by S.G. Cowen, which cited its declining
immunoassay market share, as well as generic risks to 2004
earnings.  In spite of this downgrade, ABT still held its point
and figure and daily support levels.  The stock is on a triple
top breakout, and yesterday's trade of $43 broke through its
bearish resistance line.  Today's bearish comments sent the stock
lower and provided a test of the new support level.  The $42
level was the PnF breakout and would require a trade of $41 to
register a break below that level. A trade of $40 would be
required for a three-box reversal.  None of those things happened
today.  The fact that the stock held near $42 is a positive sign
and we will give it a chance to prove that it truly has found a
higher consolidation point.  With the company presenting data on
a new Quinolone antibiotic at this weekend's ICAAC conference,
there is certainly enough reason to hold the position without a
breakdown in support. The stock had been in a consolidation
pattern from the end of July through the middle of September.
The recent breakout after such a long consolidation is a strong
sign and we  will use  a sign of re-entry into the pattern as a
signal to close the play.  If it manages to hold above that
consolidation, we are probably seeing the basis for another leg
up.  We will watch tomorrow's action and a trade back above $43
can be used as a signal for new long entries.


LLL $56.15 -0.94 (+1.20) As investors have adjusted to the
probability of war with Iraq, Defense stocks are seeing a bit of
a bid again, with the Defense Industry index (DFI.X) moving back
up to the $575 level on Thursday.  A portion of this move is
likely due to the bullish move in the broad markets, but we've
also got the underlying war bid helping us along.  While buyers
were active in the broad markets over the past two days, shares
of LLL have been drifting down towards support, likely setting us
up for our next high-odds entry point.  The stock found mild
support today near $55.50, but we're looking for a dip near the
$54 level for our next entry.  Not only is that the site of
support from last week, but it is also the current location of
both the 20-dma ($54.29) and the 2-month ascending trendline.
Use a dip and rebound from that level to initiate new positions
in anticipation of a renewed assault on the $58 resistance level.
Keep stops set at $53.50.



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BGEN $30.40 (-0.54 for the week)  Biogen has rebounded slightly
the last couple of days, but remains firmly in its recent
descending channel, which began at the end of August.  The stock
has found resistance since 9/20 at $31, and today's high of
$30.87 only reinforced  that level as a major roadblock..  The
stock managed only a $0.06 gain on a day when the Dow finished up
155 points. The repeated failure at the same level looks bearish,
and that level coincides with the bottom of its recent point and
figure support.  Often support levels turn into resistance as
sellers at that level are finally able to exhaust buyers, and
that appears to be what has happened to BGEN.  After seeing its
psoriasis treatment delayed, which has opened the door to
competition from Amgen, the stock was hit hard.  More bad news
for Biogen came in the form of positive test results from another
competitor, Genentech. Genentech said that patients who were
treated with experimental psoriasis drug Raptiva had significant
improvement in their conditions.  The drug,  which is in late
stage testing, is being jointly developed by Genentech and Xoma,
and the companies have said they will file an application to
market the drug by the end of the year.  Raptiva has already
received approval for European marketing, after it wins
regulatory clearance.  We will remain short on BGEN and look for
a break below $30 for new entries.  More conservative traders can
look for a trade below Tuesday's low of $28.71 to initiate short


BSC $57.92 (+0.20 for the week)  BSC caught the rising tide and
rallied with some of the other financials.  We are betting that
the rally will be short lived.  This morning brought a further
downgrade of J.P. Morgan by Lehman Brothers, who just lowered
estimates a week ago.  The Lehman analyst cited even lower than
expected trading revenues and absence of heavy investment
securities gains for the cuts, after meeting with JPM management.
The message is clear after, Lehman's own disappointing earnings,
that trading revenues are poor industry wide.  While Goldman
Sachs actually posted decent numbers, investors don't have to
look very far past their screens to see that money has been
pulled out of the market at a furious pace.  Mutual funds have
seen record withdrawals and September's numbers have not yet been
tabulated.  The September -October swoon should continue to hit
brokers and financial institutions as investors continue to
withdraw their money from brokerage accounts.  The recent wave of
layoffs won't help either.  Although that pace improved slightly
last week, today brought with it more news of 11,000 layoffs at
SBC communications.  The math is simple - people without jobs do
not contribute to 401(K)s or purchase stocks.  We see more
downside for the sector, and with its earnings behind it, there
will be little good news to hold BSC up.  We will remain short on
BSC and traders should look for a break below today's low of
$56.68 for new entries.  More conservative traders can wait for a
trade below $55, which is the most recent level of support.


FISV $28.78 +0.68 (-2.56 for the week)  After targeting FISV on
Tuesday for its concentration in a shrinking business, the stock
was downgraded on Wednesday. SunTrust lowered their rating on the
stock from "Outperform" to "Neutral."   A similar rating was put
on the stock, as coverage was initiated by D.A. Davidson.  A
"neutral" rating on a stock is kind of like saying "it's got a
great personality."  Sell ratings are rare, but neutral is the
next best thing. The stock suffered a technical breakdown when it
dropped below $31, and yesterday's trade down to $26.50 cleared
out more support.  Today's rally lifted most boats and FISV
managed to close yesterday's gap before tumbling back below $29.
The stock established a head and shoulders formation between the
middle of July, and its breakdown in the middle of September.
The minimum downside measuring objective of the formation puts
the stock around $24.  The current bearish vertical count,
according to the point and figure chart, is $26, but it is still
being defined by the current column of "O"s, and that number
could drop to $24 with a trade of $26.  A trade of $30 would be
needed for a reversal, and so far $30 has been a level that FISV
cannot crack..  A look at the intraday chart shows the late day
rally unable to lift the stock back over $29, and yesterday's gap
now looks like it will provide some resistance.  New entries can
look for a break below $28, or if conservative, then $27.50,
which is just below today's low.


CI $73.90 +2.70 (+1.13) Financial and Insurance stocks led the
broad market advance over the past 2 days, with the Insurance
index (IUX.X) tagging on a healthy 3.85% on Thursday.  Given the
sharp decline over the past month, a bit of a rebound is to be
expected and it is worth noting that even with today's strong
move, the IUX has yet to reclaim even a third of that decline.
The 38% retracement of the recent decline is at $255, which is
also significant resistance.  CI was one of the weakest stocks in
the sector over the past month, falling back to test its one-year
low near $70 yesterday.  Today's rebound came on pretty strong
volume, so we need to be careful until this short-covering rally
runs out of steam.  But there is some serious overhead resistance
to deal with, first at the 10-dma ($74.95) and then at $76.  Look
for CI to roll over near one of these resistance levels in
conjunction with the IUX index rolling near its $255 resistance
level before initiating new positions.  If buying pressure is
sufficient to push the stock through our $76 stop, then we'll
clearly want to stand aside.  A close above $76 will have us
dropping the play.


GM – General Motors $41.52 +1.95 (-1.41)

Company Summary:
Maintaining its position as the world's #1 maker of cars and
trucks, GM has managed to diversify its business so that it is
more than just a car company.  Its automotive business
encompasses the Buick, Cadillac, Chevrolet, GMC, Oldsmobile,
Pontiac and Saturn brands, as well as others through its
affiliations with Suzuki, Saab, and Isuzu.  Non-automotive
operations include Hughes Electronics (satellites,
communications), Allison Transmission (medium and heavy-duty
transmissions), and GM Locomotive (locomotives, diesel engines).
GM has successfully spun off Delphi Automotive Systems, the
world's #1 auto parts maker.

Why We Like It:
There is an ugly underbelly of the domestic auto industry's
zero-percent financing scheme of the past year.  While it has
clearly boosted sales in the near term, it steals future sales
to satisfy current-quarter sales goals, and decreases the profit
margin on those cars being sold.  Somebody has to carry the paper
on those car loans, and with zero percent financing, it isn't
the consumer.  After trading up to the $50 level last month,
shares of GM have been sliding down the slippery slope, breaking
below the $40 level on Tuesday before the stock rebounded with the
rest of the market.  Helping the stock to a nearly 5% gain on
Thursday were comments from GM Europe's chief that the division
was sticking to its breakeven target for 2003, despite missing the
2002 targets.  That's hardly a glowing bullish endorsement, but it
was enough to give the bulls hope and GM managed a solid
performance on the day.  But you can't ignore the technical damage
that has been done lately.  The recent selloff generated a fresh
PnF price target of $27, so this little bounce looks to be just
the setup for a better entry.  That said, we need to be aware that
the stock has seen some pretty good buying volume over the past
couple days, and if it continues, we'll have to acknowledge that
we called this one wrong.  But we don't think that's going to be
the case.  GM is set to announce earnings in a couple weeks
(October 15th) and it is likely that the stock will return to its
pattern of weakness as that date approaches.  There is some
pretty stiff resistance overhead, first at $42 and continuing up
to $43.  The best entries will appear as GM rolls over from its
overhead resistance in this area, and heads back towards its
recent lows.  Those looking to enter on a breakdown will need to
wait for a drop below $38 before jumping into the play.  We are
initially placing our stop at $43.50.

BUY PUT OCT-42 GM-VV OI=3479 at $2.95 SL=1.50
BUY PUT OCT-40*GM-VH OI=5450 at $1.95 SL=1.00
BUY PUT OCT-37 GM-VU OI=3182 at $1.25 SL=0.50

Average Daily Volume = 5.30 mln


TECD – Tech Data Corporation $28.38 -1.64 (-2.33)

Company Summary:
Tech Data Corporation is a provider and distributor of
information technology products, logistics management and other
value-added services.  The company distributes microcomputer
hardware and software products to value-added resellers, direct
marketers, retailers corporate resellers and Internet resellers.
TECD and its subsidiaries distribute to more than 80 countries
and serve over 100,000 resellers in the United States, Canada,
the Caribbean, Latin America, Europe and the Middle East.  The
company's broad assortment of vendors and products meets the
customers' need for a cost-effective link to those products
through a single source.

Why We Like It:
The broad markets may be in rally mode, but apparently somebody
forgot to inform the Computer Hardware and Networking stocks.
While the DOW staged another triple-digit advance on Thursday,
the Semiconductor index (SOX.X) got whacked to the tune of 3% and
the Networking index (NWX.X) slid by more than 4.5% following
some negative comments from NT and BRCD's refusal to give forward
guidance.  Clearly IT spending has yet to see any improvement and
judging from the comments coming out of this sector of the market,
the CEOs of these companies don't have any idea when it will get
any better.  Shares of TECD have had a rough go of things over the
past five months and even the rally attempt in August got turned
back at the descending trendline (then at $36.50).  Since then the
stock has broken the $31.50 support level and is continuing to
fall.  Even the broad market rally today couldn't help, as TECD
fell by nearly 5.5% on heavy volume (60% above the ADV) on its way
to a fresh 52-week low.  The drop below $31 generated a fresh
triple-bottom breakdown on the PnF chart and if the $28 level
fails to provide support, it seems clear that the stock will be
headed down to the $25 level.  TECD has been finding intraday
resistance just below $31 lately, so another failed rally near
that level would make for an ideal entry.  But given the heavy
selling today, we'll probably have to settle for a failed rally
in the $29.50-30.00 area.  Trading a breakdown could work well on
this weakling, but we want to wait for TECD to drop below $28
before piling on.  Initial stops are set at $31.

BUY PUT OCT-30*TDQ-VF OI=1017 at $3.00 SL=1.50
BUY PUT OCT-25 TDQ-VE OI= 131 at $1.00 SL=0.50

Average Daily Volume = 710 K

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The Option Investor Newsletter                 Thursday 09-26-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Play of the Day: PUT - TECD
Traders Corner: Charting: Gaps; At the Start & Continuation of trends
Traders Corner: A Day in the Life
Options 101: "MO" Dividends


TECD – Tech Data Corporation $28.38 -1.64 (-2.33)

Company Summary:
Tech Data Corporation is a provider and distributor of
information technology products, logistics management and other
value-added services.  The company distributes microcomputer
hardware and software products to value-added resellers, direct
marketers, retailers corporate resellers and Internet resellers.
TECD and its subsidiaries distribute to more than 80 countries
and serve over 100,000 resellers in the United States, Canada,
the Caribbean, Latin America, Europe and the Middle East.  The
company's broad assortment of vendors and products meets the
customers' need for a cost-effective link to those products
through a single source.

Why We Like It:
The broad markets may be in rally mode, but apparently somebody
forgot to inform the Computer Hardware and Networking stocks.
While the DOW staged another triple-digit advance on Thursday,
the Semiconductor index (SOX.X) got whacked to the tune of 3% and
the Networking index (NWX.X) slid by more than 4.5% following
some negative comments from NT and BRCD's refusal to give forward
guidance.  Clearly IT spending has yet to see any improvement and
judging from the comments coming out of this sector of the market,
the CEOs of these companies don't have any idea when it will get
any better.  Shares of TECD have had a rough go of things over the
past five months and even the rally attempt in August got turned
back at the descending trendline (then at $36.50).  Since then the
stock has broken the $31.50 support level and is continuing to
fall.  Even the broad market rally today couldn't help, as TECD
fell by nearly 5.5% on heavy volume (60% above the ADV) on its way
to a fresh 52-week low.  The drop below $31 generated a fresh
triple-bottom breakdown on the PnF chart and if the $28 level
fails to provide support, it seems clear that the stock will be
headed down to the $25 level.  TECD has been finding intraday
resistance just below $31 lately, so another failed rally near
that level would make for an ideal entry.  But given the heavy
selling today, we'll probably have to settle for a failed rally
in the $29.50-30.00 area.  Trading a breakdown could work well on
this weakling, but we want to wait for TECD to drop below $28
before piling on.  Initial stops are set at $31.

BUY PUT OCT-30*TDQ-VF OI=1017 at $3.00 SL=1.50
BUY PUT OCT-25 TDQ-VE OI= 131 at $1.00 SL=0.50

Average Daily Volume = 710 K

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Charting: Gaps; At the Start & Continuation of trends
By Leigh Stevens

A price gap is formed when any traded item has a low that is the
above the prior days high – an upside gap – or when the stock or
index high is below the previous day’s low, creating a downside
gap.  Gaps are price areas where no trading took place from one
session to the next.  This space between two consecutive day’s
price ranges, as seen on a bar or candlestick chart, has various
degrees of significance in terms of predicting possible trend
continuations or reversals that may be underway.

Most price gaps occur on overnight news or news that came out
after the close of trading; e.g., company earnings announcements
- or commodity reports, such as API oil inventory (stocks)
reports, that are more bullish or bearish than expectations.

It should be noted that gaps are rarely seen on the S&P 500 index
(SPX) or Dow Industrial (INDU) daily charts – why? (Minor gaps
are sometimes seen on their intraday charts; e.g., hourly.) Gap
“events”, such as when some overnight news “surprises” the market
and causes sharp selling or substantial buying on the market
opening will also often mean that order imbalances show up in a
number of S&P stocks; for example, substantially more sell orders
come into the specialist for a stock, relative to buy orders held
in the specialist’s (order) “book”.

Using the example of a downside move and since the specialists
are charged with maintaining an “orderly” market - to gain a bit
of time for buy orders to come in or for the specialist to
calculate what they can and need to buy (they are the buyer or
seller of “last resort”), there is frequently a delayed opening
for a number of key stocks in the S&P and Dow. Delayed openings
due to order imbalances are not uncommon.

As the exchange also wants to publish an “open”, the convention
or rule for the S&P and the Dow is to calculate the index open
for stocks not immediately trading, based on their “last” price,
which is the prior close.  Based on this convention, there is no
apparent chart “gap” – the index “open”, which often is also the
intraday high or low, comes in near the closing price.

To get an idea of the “true” gap in the S&P 500 (SPX) and the Dow
30, you need to look at the nearby futures – and also add in
“fair value” to reach an equivalent price to the actual index.
[Coming 12 months Q-charts S&P futures symbols: SP02Z (Dec);
SP03H (Mar); SP03M (June); SP03U (Sept) – until the 3rd. Friday.]

Continuing with an example of a downside gap - SPX closed at
900.00 and the nearby S&P 500 futures closed at 902.00, as “fair
value” for the futures is 200 points above the actual index;
i.e., for the futures to be EQUAL to the actual dividend-paying
group of stocks, they must trade 200 points higher than “cash”.

A web site with the day’s index futures fair value is at
More on “fair value” can be found in my prior T.C. article at

If “front-month” S&P futures open at 890.00, it’s equivalent to
an SPX (“cash”) index opening at 892.00. Therefore, if SPX closed
at 900.00, the SPX downside price “gap” is the difference between
the 900.00 close and an opening equal to 892.00. (The reverse is
true of a gap HIGHER opening – assuming a close at 900 and S&P
futures open 10 points higher and fair value is 2.00, assume an
SPX actual index open at approximately 908.00.)

With individual stocks, upside or downside chart gaps are
apparent on a bar chart, as the opening price is the actual first
trade; e.g., GE closes at 50, announces better than expected
earnings and then gaps higher by opening at 52.00 and trading up
from there – the (upside) chart gap is the non-traded range
between 50.00 and 52.00.

Unlike the S&P/Dow, chart gaps are commonly seen in the NASDAQ
indexes (COMPX & NDX), as they have no delayed openings - match
ups are made electronically based on whatever orders are in the
electronic trading system. You may have noticed the resulting
chart gaps, especially on sharply higher and lower openings.
This may be puzzling when you do NOT see any similar chart gaps
in the S&P and Dow indexes when some event has triggered a broad
based reaction – not just in the Nasdaq market.

Generally, gaps below the market tend to act as support areas and
gaps above the market suggest resistance and areas where there
will be likely selling interest. Since a consensus expectation is
“built into” the last traded price or close of every stock, index
or commodity, significant new influences affecting the market’s
perceptions of what the current and/or future price level for
that item should be, causes an immediate adjustment in the
opening price during regular exchange hours.

Buyers will either be willing to pay more and potential sellers
will want higher levels to induce them to sell or sellers will be
aggressive in offering the item at lower levels and buyers will
not be interested in purchasing unless prices drop especially in
the early trading (open) which often becomes the high or low.

Upside gaps are price areas where buyers were unable to make any
purchases, as selling occurred only above the gap area.  Downside
gaps are price areas where sellers were unable to make any sales
as they could only transact at levels below the gap.

This is what is behind the notion that gaps BELOW the market will
tend to act a support and gaps ABOVE the market, will tend to act
as resistance.  A move back down to an upside gap often brings in
additional buying, unfulfilled at this lower level from earlier
and a rebound back up to an overhead (downside) gap can attract
interested sellers that would have sold more in the area where
prices had previously “gapped” down.

There is a common saying that “gaps get filled in” when a market
settles down in subsequent days and weeks after the gap “event”.
It would be better to say that gaps “TEND” to get filled in – as
they (the gaps) don’t always get “filled”.

To see situations where gaps do NOT get filled, we need to
differentiate between some different types of gaps and see gaps
that indicate a shift or jump to a faster rate of upside or
downside MOMENTUM – as when runaway or “measuring” gaps are
created. Or, in a later Trader’s Corner article, where gaps are
part of a reversal pattern.

Gaps that are part of ongoing trends and that “signal” an
acceleration of upside or downside momentum are part of
“continuation” patterns.  Gaps that begin new trends become the
kick off to a trend reversal. But first I’ll discuss the most
common type of gap – called, guess what!? – “common” gaps.

So-called “common” gaps occur frequently, are merely part of
normal price activity and are not especially significant – these
gaps are the ones that get “filled in” regularly.  In the stock
market, because of the tendency to halt trading in a particular
company if news comes out that affects the stock, resumption of
trading can easily result in a price gap.

Examples of COMMON gaps are found in the middle of the chart
below, along with the other types of chart gaps that are
discussed following this explanation of common gaps –


Beside intraday trading halts in stocks, overnight news affecting
equities (or commodities) occur frequently as various economic
and business reports are released after regular trading hours, as
are earnings reports and to some extent, other companies
announcements that might materially affect a related stock’s

Given the extent of after hours, or 24-hour, trading, there is
some ability for participants to react to news in marking prices
up or down, but the official stock price record occurs only
during regular trading hours and because of this, gaps are even
more prone to develop.

For the most part, price gaps occur frequently on chart types
that display the session low and high.  Gaps will of course not
be seen on close-only line charts. Point and Figure charts will
account for the up or down jump that causes the appearance of a
chart gap as if there were actual trades that occurred in the gap

A breakaway gap, as the name implies, is a gap that bursts out of
the pack, so to speak – it is a gap that develops when prices
often jump well above or below what has been the normal trading
range up until this gap event.

This type of gap typically marks a first “signal” of a trend
reversal; e.g., the trend was up, but then a downside breakaway
gap occurred which was the beginning of a trend reversal from up
to down (a trendline break was also involved), as can be seen in
the chart below – the type of breakaway gap that occurs afger the
trend is already well-developed, called a “measuring” or
“runaway” gap is also noted on this chart -

The more volatile stocks and many futures markets have more of a
tendency for gaps than others – the very widely traded stocks
will tend to have fewer breakaway type gaps that dramatically
initiate trend reversals.

The breakaway gap will tend to either just get filled in, or
never quite completely, during the price move that follows it –
either buyers are eager to buy dips back toward the breakaway gap
area or sellers are active on selling rallies that approach such
an overhead gap.

Breakaway gaps are milestones on a chart and are widely followed.
Once a price move is well past and during a later trend, prices
may get back to a prior breakaway gap area and this occurrence
now lacks any special significance.

A “runaway” or “measuring” gap describes a gap occurring when a
trend accelerates in the direction of the trend indicated by the
breakaway gap – it can be an upside or downside chart gap.  This
occurs more in the second phases of bull and markets when there
is increasing interest, particularly public interest, in a stock
or the overall market.  A series of these gaps can occur, but a
succession of such gaps tends to be more common in the futures

A runaway gap is also often called a measuring gap, as it has a
“measuring” implication for the further possible upside or
downside potential of the move underway, because such gaps often
(not always) appear about midway in a price swing as can be seen
below in a revisit of the first stock chart shown -


Gaps that tend to get “filled in” include:
1.) Upside gaps occurring within an overall down trend; i.e., a
significant prior upswing high is not exceeded AFTER the gap.
2.) Downside gaps occurring within an overall up trend; i.e., a
significant prior downswing low is not exceeded after the gap.
3.) Gaps occurring within a sideways trend or within a trading

Gaps that might NOT get filled in during the current trend:
1.) Breakaway gaps
2.) Runaway or measuring gaps

It’s the EXCEPTIONS (to the rule of thumb) that tend to kill you,
trading wise – this when you start to assume that technical
patterns won’t “fail” you and you DON’T protect yourself by using
exit/stop points if you are wrong in your assumption(s).


A Day in the Life
By John Seckinger

First, the bond market tanks, then Gold comes under pressure,
followed by a rebound in the Utility Index.  All point towards
higher equities, which do in fact rise by 158 points and 200
points off their lows.  So, why didn’t I go long?

The date in question is September 25, 2002.  Micron missed
estimates the night before and I was sure to wake up to a lower
opening.  Didn’t happen, thanks to GE affirming estimates and
ASML (Europe's largest maker of semiconductor equipment)
reiterating shipment expectations.  Ok, no problem.  I exited a
bond trade the day prior and was flat going into Wednesday’s
session.  Time to clear my head and just trade.  I had done
extensive technical analysis of the Dow the night prior, so all I
had to do was to believe in my support and resistance levels.
Easier said then done.

I will admit it, some days I am not successful at executing a
known strategy.  Wednesday was one of those days.  Looking at the
chart below, I drew a blue line in at 7682 (low on July 23rd) and
wanted to use the line as a pivot (above the line, buy; below,
sell).  However, just a minute or so into trading and the market
was markedly above this line.  I couldn’t put on a position in
“no-mans” land, so I figured it would be an hour or so before the
market gives me a signal.

Roughly 1:45 later, the blue line comes into play again.  Ok,
let’s go bearish and get short, quick.  As my trading platform
races from one Put quote to another, an interesting thing
happens; The market rises.  I wasn’t too upset, because at the
same time I wanted to find some fundamental news regarding the
reversal.  Before I found any news, the market reversed and went
higher above the blue line.  I then started to realize the move
was technical in nature.  That is a good thing, I can trade
technical patterns.

I will try to make the rest of it short.  Five minutes after the
blue line was tested, I began to worry about going long because
of the 22 and 50 PMA’s looming overhead.  And then, after those
averages were in-fact penetrated, I got nervous over a descending
trend line (black line) which had been on my radar screen since
May.  After the black line offered no resistance, I had to check
to see if I drew the line wrong.  That took a few minutes, and by
that time, I figured I would just grab a quick move to 7880.
Well, I then wondered if 50 points was enough.  Maybe risk was
getting to great, I thought.  With that said, I missed it all.

Chart of the Dow Jones Industrial Average Index, 5-minute

Normally, I would not be mad at all.  I understand how dynamic
the markets can be, and I have easily missed thousands of points
due to “unexplainable moves”.  However, Wednesday’s move was
explainable and should have become a profitable trading day.  Why
do I stare at charts on Saturday and Sunday morning?  For this
exact reason.  Execution is 80 percent of trading, and this was
just another painful lesson explaining such a truth.

Ok, that lesson is now behind us.  Well, almost.  To put salt on
the wounds, other bullish indicators included Gold shares selling
off, the Utility Index rebounding, and the Semiconductor Sector
breaking a 9-day string of lower highs by rallying above
Tuesday’s high of 247.61.  So, where was the Dow when the Sox
took out the 247.61 level?  At 7740 and before the Dow went down
and tested the blue line.  As for Gold, this index actually came
under solid selling pressure as the Dow was at 7700, after the
buy signal from the Sox.

Turning to The Utility Index (UTY), it made its bullish move when
the Dow was at 7760 and rebounding from the early morning
reversal.  I convinced myself at that juncture that the Dow was
leading the UTY, and that I should not put much weight in this
interest-sensitive index.  Not a smart trading decision,
especially when the UTY Index has been a fantastic leading
indicator in the past.

Last, but certainly not least, was the selling seen in the Bond
market.  I first start with the yield curve, which was not
exactly giving a strong buy signal.  This could explain my
nervousness.  Nevertheless, there seemed to be cash leaving the
long-end and entering stocks.  The barometer I use is a full
point move in the December 30-year (USZ2), which did not happen
until the Dow was at 7805.  The interesting thing is that, at
7805, the aforementioned black line was tested.  At the time, I
did not make the connection.  Note:  Whenever the long bond is
down/up by more than a full point (32/32), usually there is a
strong asset allocation taking place and will most likely not
reverse during the trading day.

Ok, what is the lesson here?  If, as a trader, you are going to
spend countless hours studying technical analysis, please,
execute when the time comes.

Chart of the Dow Jones Industrial Index, Daily

Looking at a Daily chart of the Dow, the lines that extend far
leftwards are psychological levels from either a weekly or a
monthly level.  These levels should be given more weight, since
traders have had more time to associate and study them when
performing technical analysis.  The dark green lines extending
rightward, to me, represent a possible pivot area in the Dow.  As
long as the blue line holds, these are my projected levels.

The unemotional aspect of my trading might be a result of giving
these lines too much respect.  Why?  Well, I know that it makes
sense to be aware of earnings, economic events, events, etc..;
however, I have to “trade what I see and not what I know” (a quote Jeff
Bailey has been using for a while).  If I see prices
heading higher, why fight the trend?  Because the L.E.I. index
came in lower-than-expected?  I think not.

As I have stated in the past, I only put a lot of weight in
fundamental analysis when technical analysis fails; diluting the
importance of these support and resistance lines.  This usually
only happens when there is a fundamental shock to the market.  A
shock that absolutely cannot be discarded as “short covering”.

Side notes:  Except when staying in hotel rooms, I have not
watched CNBC in over a year and a half.  I find it too political
and bullish; moreover, I became cynical on how they “spun”
certain market events.  That is just my opinion.

Continuing the cynicism theme, here is a list of economic events
I will not give much weight to (even though some I really should)
given the current economic environment:

L.E.I. (7/10th of the report is known beforehand), Durable Goods
(just too volatile to understand), E.C.I. (this used to be a
great release, but the weighting of health benefits inside the
report got convoluted), Non-farm report (Yes, I do mean it.  This
number is the most overrated of all of them.  It just seems as
though most of the number is priced in before the release), and
the ISM Services Index (not to be confused with an important
release: The ISM Index).

Hey, that felt like therapy.  Let’s continue the rambling.  I do
really enjoy watching the QQQ’s, and it is amazing how only 10
companies make up 44.44% of the entire index.  Here is the list:

1.  Microsoft Corp                   13.31%
2.  Intel Corp                        5.68%
3.  Cisco Systems Inc                 5.26%
4.  Amgen Inc                         3.91%
5.  QUALCOMM Incorporated             3.74%
6.  Dell Computer Corp                3.70%
7.  Oracle Corp                       3.19%
8.  Maxim Integrated Products Inc     2.08%
9.  Bed Bath & Beyond Inc.            1.83%
10. Intuit                            1.73%

Total                                44.44%

I just thought I would throw that in here.

So, was there a point to some of these ramblings?  Well, kind of.
Being a trader, there is so much information thrown at you,
almost making it impossible to construct a clear, original
thought.  It is ok to spend time researching different areas of
the marketplace; however, do not be afraid to simply put these
“distractions” aside if they seem to be interfering with your
trading.  Moreover, it is fine to start with a very complex
trading system that involves all possible variables relating to
price action; however, ideally the end result should be a smooth,
well-run machine.  Simple to use, easy for the developer to
understand.  The proof will be in the pudding.  Profitable, stick
with it.  Not profitable, time to make some changes.


"MO" Dividends
Buzz Lynn

Excuse me waiter, could I get some more dividend yield, please?
"Coming right up!" replies the waiter.  Maybe a better title would
be the friendly reminder to be careful what we wish for because we
just might get it.

Here I was engaged in composition of a completely different topic
and along comes news out of Philip Morris that they will miss
earnings.  Keenly interested in the business end of the news,
Fundamentals Guy was busy with his nose buried in the computer
screen looking for the details.  Was this really bad news or a
buying opportunity?  Option trading had yet to enter my mind.

I was still engaged in the numbers when I got a call from
technical trading guru, LEAPS Editor, and resident rocket
scientist, Mark Phillips.  The upshot of the conversation was a
potentially great way to make a trade on this stock and capture
that tasty dividend (currently $2.56 annually) while protecting
ourselves from further price erosion.

But before I get into the trade, let me explain why I'm hooked on
dividends right now.  It all stems from a belief based on evidence
that the world is headed for a period of deflation - that is,
where prices fall but the value of debt remains the same.  In
order to service all that debt, people are going to need income.

Stock appreciation is no longer a foregone conclusion - nobody
earns income from the selling of declining stocks, except the
broker.  With bond yields declining, nobody is going to make the
house payment, buy groceries or take vacations on a 1.0-3.5%
yield.  CD's are lucky to pay 2%.  So where are we going to get
income?  Either from a job or from a dividend paying stock.  The
trick is to make sure the dividend is safe from reduction.

Don't get me wrong.  In the severest case where prices of
EVERYTHING fall - soda pop, steak, cigarettes, clothing, cars,
houses (yes, houses), - companies will have no pricing power, thus
no ability to generate greater sales except by taking them from
other companies.  In that scenario, dividends will fall as
earnings fall.  That's why we want to buy dividends that are as
close to "unsinkable" as possible.  With one of the most
historically stable dividend histories I've seen, I believe MO
fits that description and provides a margin of safety in the

OK, I like them, but they just announced an earnings shortfall.
Now what?  For the answer, follow this hypothetical example.
Suppose they earned $4 in FY2001.  "The Street" expects $5 in
FY2002.  Half way through the year, the company says it will hit
Q3 earnings, but warns that growth will keep earnings to $4.50.
With only 1 quarter left, that means the company will lose $0.50
in a hurry.  OUCH!  Yet they called for 8-10% growth in FY2003
over their new $4.50 number.

What's that mean?  With analysts and the news media tripping over
themselves during the past couple of weeks noting that marketing
expenses have risen drastically in order to protect market share
in the tobacco division, they won't hit the numbers.  That's a
marketing expense in my opinion and a temporary setback.

Effectively, MO has reduced the baseline from which they will
grow.  Do I care?  Not much.  Net earnings after all additional,
optional, extra charges will be somewhere around $4.50 in real
numbers as they announced today, yet the dividend remains at
$2.56.  That's still nearly $2 of earnings in excess of dividends.
They are not paying out every dime they make, leaving plenty of
cushion for that tasty dividend.  If you are a widow, nun, or
orphan, you are feeling pretty safe right now.

Back to the immediate view in the windshield. . .MO was clocked
for $4 under today's close, trading down around $38 +/- after
hours.  Let's see, a little math says that a $2.56 dividend
divided by a $38 stock price is a 6.7% yield.  Anybody know where
else they can get that kind of income with relative safety?  Me

Yet we have a fly in the ointment.  As Jeff Bailey has pointed
out, MO's chart is looking a bit bearish.  Let's take a look at
the point and figure chart, which give us a simple and effective
measure of the market's view of risk and reward.

MO point and figure chart:

Why, looky there!  A double bottom breakdown with anew price
target of $31.  Looks like plenty of downside.

Let's look at another chart - a candle chart this time.

Mo weekly candle chart:

If MO opens tomorrow under $40, the PnF shows a definite down
signal.  But even the candle chart above shows a possible target
of $35 (former support).  I neglected the middle dip under $20 on
purpose.  Those were the days that judgments and settlements might
have put them out of business.  At least that was the consensus

Great, maybe I can buy MO cheaper in coming days or weeks!  At
$35, the yield reaches 7.3%.  At $31, the yield is 8.3%.  I like
that all day long!  The risk is that the price continues to fall,
which erodes capital.  We don't want to buy a tasty dividend and
still lose money.

What to do?  A collar, of course!  That's where we sell calls and
use the proceeds to buy puts.  We protect our downside AND our
dividend in the process.  If you are wondering what in the heck a
collar is, be sure to check out Mark Phillip's excellent article
on the subject here:


We'll have to see where prices open tomorrow, but there's no
reason we can't pretend with the closing prices today.  This is
always a good strategy that doesn't cost a dime (or very little)
to protect the downside.  Today, Mo closed at $42.73.  Say we'd
like to protect our downside for the next 60 days just in case the
"ugly" happens.  Looking out to November, we see that a NOV42.5
put costs $2.55 if we split the bid/ask.  Kind of expensive, as it
puts our total cost at over $45.  The good news is that we can
sell the JAN45 call for $2.55 splitting the bid/ask.  The net cost
of protection is zero!

Let's recap.  Net cost is zero to protect every dollar of downside
through November expiration and offer some upside to $45 by
January expiration.  In the meantime, we collect December's
dividend.  It doesn't matter where the price goes.  We still make

I love the protection of a collar if I'm trying to pick an entry
for longer-term hold.  For me, it's all about safety, dividends,
and capital preservation.  Who says options are dangerous when
they can hedge risks for zero cost?

That's it for tonight.  Best wishes for a great weekend!


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