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Daily Newsletter, Tuesday, 10/01/2002

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The Option Investor Newsletter                 Tuesday 10-01-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Unbelievable!
Index Trader Wrap: Dow surges 4.5% after dismal September
Market Sentiment: Balancing Act
Weekly Fund Screen: Low-Risk/Expense Health Funds


Updated on the site tonight:
Swing Trader Game Plan: I Hate When This Happens


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      10-01-2002           High     Low     Volume Advance/Decline
DJIA     7938.79 +346.90  7940.59  7593.04 2.03 bln   2200/1009
NASDAQ   1213.72 + 41.70  1214.01  1160.71 1.67 bln   1881/1525
S&P 100   425.74 + 18.49   425.74   406.57   Totals   4081/2634 
S&P 500   847.91 + 32.63   847.93   812.82 
RUS 2000  368.09 +  5.82   368.09   357.15 
DJ TRANS 2225.18 + 74.10  2225.18  2138.98   
VIX        40.13 -  4.44    45.32    39.77   
VXN        57.24 -  1.11    62.01    57.07
Total Vol   3,947M
Total UpVol 3,008M
Total DnVol   850M
52wk Highs   150 
52wk Lows    538
TRIN        0.61
PUT/CALL    0.87
************************************************************

Unbelievable!

The markets started off slow but finished with a bang. The Dow
opened marginally positive and traded sideways until 12:15 and 
then exploded on the Iraq headlines. Actually exploded is the
wrong term, it was more like built into a bonfire after being
started by a smoldering cigarette. The biggest winners were the 
big caps as the safest ports in a storm. The overall take is 
one day does not an October make. 

Dow Chart


 

Nasdaq Chart


 

Everybody has heard the adage. Toss a frog in boiling water and 
he will jump out. Put it in a pan of cold water and turn up the 
heat and it will not jump and be boiled alive. I have never tried
this but it is exactly how many investors felt after the close. 
The markets smoldered with an underlying bid and a slow building
of higher lows until about 12:15. Shorts were starting to get 
uneasy as the Dow moved from 7600 to 7700 but after multiple
attempts at that level most expected just another failed attempt
and a roll over into an October decline. 

Just before 1:PM the 7700 gate broke but it did so slowly with a
steady move into the close. The move had a couple plateaus about
50 points apart which worked to convince bears that the momentum
move was over. Thus stops got nudged again and again and shorts
found themselves looking at a +300 point Dow and wondering how
the water got so hot. 

The reasoning given for the bounce was the Iraq news but it 
was squashed several minutes after the announcement as nothing
new. Still with news channels reporting it over and over I 
could see where some retail traders would decide to bail out
or some positions. In reality I believe it was the lack of 
major earnings warnings that sparked the market. Two days 
without bad news makes bears weak. We also saw some asset 
allocation in progress. Add the positive ISM numbers and 
suddenly the bulls are thinking rally. 

Did I say "positive" ISM numbers? The headline number fell below
expectations for the third consecutive month and fell below 50
to 49.5. This indicates a shrinking economy instead of a growing
economy. Had it been a stand alone number we would likely be 
much lower tonight. Instead there were some signs of progress
in the internal numbers. New orders rose to 50.2 from 49.7
last month. Deliveries increased from 53.4 to 55.7. Inventories
fell from 45.2 to 43.6. After seven months of growth the
economy is falling back into recession but only very slightly
as indicated by the internals. The key number dragging down
the average was production which fell to 50.9 from 55.9 last
month. Despite the small decline in the headline number the
last three months have been basically flat with an average of
50.1. Definitely not expanding but bulls are claiming no
decline either. More on this later.

Chain Store sales fell again -0.8% for the week ended 9/21.
Year over year growth fell to only +2.0% from +3.7% in early
September. Most chain stores, including the discounters have
warned of falling sales and decreasing consumer traffic for
the last four weeks. The back to school season was miserable
and according to current surveys the holiday season will also
be miserable. One survey showed 57% of consumers were planning
to spend less money this year than last. When you consider 
that the periods now being compared against were the weeks
immediately after the 9/11 attack when retail was almost zero
you can see how bad these numbers really are. There is really
an implied decline when you consider that year ago period.
We also have the dock strike/lock out on the west coast. 
The news reporters have been quick to point out multiple
times a day that it is costing the U.S. $1 billion a day
in lost GDP. Whether it is true or not the 3Q GDP is only
estimated to be $29 billion. Take a few billion off here
and there and suddenly you have a real recession. I happen
to believe the goods on the ships will be delivered in time
for the holidays but nobody will be there to buy them anyway.

Zero percent is generating zero interest. Auto sales dropped
to an annual rate of 16.3 million units from 18.7 million
units last month. With zero percent interest for up to five
years, added sales incentives and a new model year the pace 
of sales still slowed. This suggests that those who wanted
to buy a car already have and we could be slamming up against
the slow holiday season with higher inventories and no buyers.
GM sales fell sharply from 5.5 million to 4.1 million units. 
They had been leading the league in performance and now led
in the sales drop.

Construction Spending fell -0.4% and posted the fourth 
consecutive month of decline. Commercial spending fell the 
hardest at -2.0% with office construction down -4.6%. This
puts commercial spending down -18.6% from last years levels. 
New residential construction is also slowing with single
family dropping -0.7% and the third monthly drop. With
the commercial and residential construction drop accelerating
it is evident that the economy is moving into rougher times. 
At least evident to me. 

Good news today came in the slower pace of layoffs for September.
The Challenger report showed only -70,057 workers laid off 
compared to -118,000 in August. While the rate of layoff is
decreasing there is still no hiring. Businesses are down to 
the bare bones staff and would be hard pressed to keep up the
layoff pace of -100K a month that was posted in early 2002. 
However, remember there have been several high profile cuts
announced over the last couple weeks for execution in the 4Q.

The TV networks announced that they were nearly sold out of 
advertising space for the 4Q. They said there was a pickup 
in bookings led by the automobile companies and chain stores
and that prices paid were up from the 3Q bookings. I guess 
you know what that means. Those of us that are not planning 
to buy cars or low rider jeans will have to sit though 
thousands of commercials trying to change our minds before
the holidays. I am sure Bowflex and FitnessMadeSimple.com 
will be high on the cable list as well. 

The market soared +346 points but forecasts collapsed. Abbey
Joseph Cohen ranks up at the top of the perma bulls with a
12 month estimate for the S&P of 1300. Tom McManus of BAC cut
his 12 month estimates to 1000. Those are the optimistic ones. 
Merril Lynch lowered their estimates today to a target of 860 
for the S&P in 12 months. Richard Bernstein said the valuation
had improved on falling interest rates but earnings still
ruled and expected returns were still too high. JP Morgan
cut S&P estimates to 800 on the same outlook that earnings
were going to be weak. They said PE contraction was still
likely as the earnings backdrop remained weak and there were
few signs of a sustained recovery. Considering the S&P closed
Tuesday at 847, three of those four estimates don't project
a rosy picture for the next year. 

After the close Dell raised guidance for the quarter. NOT!
It was widely reported that Dell had raised guidance and 
was highly optimistic about the current quarter. I hate to 
be the wet blanket but their previous guidance was for $.20
to $.21 cents and analyst's estimates were for $.21 cents. 
Dell "raised" their guidance to the high end of their range
on the basis of increased cost cutting efforts and slightly
higher sales. This higher end of the range was $.21 cents
and exactly inline with analyst's estimates. They did raise
revenue estimates to $9.1 billion from the $8.9 billion that
analyst's had expected. They said broad-based momentum across
their product line from increased market share was feeding
the gains. Dell spun the press release very well and rose
more than $1 in after hours. The Nasdaq futures jumped 
as well but fell back to the flat line after the facts 
were assimilated. 

So what happened today? The general consensus was an asset
allocation program. If you remember last week I mentioned
that we could see some asset allocation programs at the
end of the quarter. This happens when the ratio of stocks
to bonds becomes lopsided compared to stated goals of 
mutual funds and pension plans. With bonds at decade highs
and stock markets at 4-6 year lows the possibility of a
weighting mismatch is almost guaranteed if you don't have
an actively managed fund. Periodically funds rebalance their
portfolios by reallocating their assets. With the two-year
note trading at 1.69% yesterday and below the Fed funds
target rate of 1.75% something had to give. The yield on 
the ten-year note jumped +0.78 today and in bond terms that
is a month of movement. There was heavy selling and that
money was put to work in stocks. What triggered the selling
in the bonds was the announcement by FNM that their duration
spread had narrowed from 14 months to 10 and this was without
massive buying of 10-year treasuries. It had been widely
rumored that they would have to buy up to $100 billion in
treasuries to narrow the gap. This was having a strong impact
in holding up the treasuries because nobody wanted to sell
if they were going to have to close this gap in the open
market.

The majority of the gains today were in the big caps. The
Dow was up +4.56%, the OEX +4.54%, SPX +4.0%. The Russell 2000
only gained +1.60%. Typically after major market bottoms the
small caps are the leading index not the big caps. Traders
on the floor of the NYSE this morning were expecting only 
a +50 to +80 point day and then another roll over. This was
exactly what I was expecting as well. Obviously there were
a lot of traders caught off guard and those traders had to
cover in disbelief as the afternoon wore on. I suspect the
asset allocation triggered the short squeeze but then the
squeeze fed upon itself in the closing minutes. 

Tomorrow will be interesting. The Dell news after the close
spiked the futures to strongly positive and ran the QQQ up
to $22.00. After the realization that Dell really was not
making that big of a guidance change we could see some of the
excitement wane. Normally a big move like we saw on Tuesday
is met with profit taking the day after. We are in October
and this is a month known for market bottoms. There are no
economic reports and the markets will be left to trade on 
stock news alone. Burlington Northern warned after the close
but nothing else of merit. This means there is no evident
direction but we could be heavy after today's gains. 

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Dow surges 4.5% after dismal September

Stocks posted strong gains today as the Dow Industrials (INDU) 
7,938 +4.5% surged 346 points while mixed economic data, labor 
disputes and news out of Iraq gave traders plenty to chew on.

Checking the data, the Institute of Supply Management Index 
slipped below the 50% level to 49.5% in September, which 
indicates a contraction in the manufacturing sector.

The "negativity" from the ISM report was partially offset by 
outplacement firm Challenger, Gray & Christmas announcing that 
job cuts fell to a 22-month low in September.

Labor disputes between representatives of the International 
Longshore and Warehouse Union (ILWU) were brought to a crescendo 
with the Pacific Maritime Association (PMA) after ILWU 
representatives stormed out of labor discussions due to PMA 
bodyguards in the meeting room.  ILWU President James Spinoza 
told reporters "There were two gentlemen here with guns."

President George W. Bush said earlier today that he hoped the two 
sides would get back to contract talks, use federal mediation, 
and re-open West Coast ports idled from a lockout ordered by the 
PMA.  Some economist's predict the shutdown could cost the U.S. 
economy as much as $1 billion a day, while some believe that $1 
billion is a conservative estimate should the lockout drag on as 
perishables begin to sour and the holiday retail season grows 
near.

A late afternoon surge in stock prices came after United Nations 
inspectors reached an agreement with the Iraqis in Vienna, 
Austria on logistics for a new mission to reassess Saddam 
Hussein's arsenal of weapons of mass destruction.  Iraq said it 
expected an advance party in Baghdad in two weeks.    The U.N.'s 
chief inspector Hans Blix said that "Iraqi representative said 
that they accept all the rights of inspections that are laid 
down" in previous U.N. resolutions.

Pick then choose

A trader or investor could pick any one of the above "headlines" 
from today and make a very good point for either a bullish or 
bearish trade.

Shares of Gap Inc (NYSE:GPS) $10.11 -6.82%, which has lagged the 
retailing group in the past 18-months closed at a 52-week low 
after it was said to have lots of T-shirts, pants and fleece 
sitting on the water.

While the broader retailing group was lower for the bulk of the 
session, the comeback in the S&P Retail Index (RLX.X) 272.55 
+3.02% and Retail HOLDRS (AMEX:RTH) 72.60 +2.22% hinted that even 
the most bearish of bears were doing some covering on weakness.

Reading some "gold" leaves

So where do we go from here?  I'm thinking the Gold/Silver Index 
(XAU.X) 67.62 -3.03% may hold the clue.  In recent months, this 
has been the sector that has DIVERGED from the market averages.  
It wasn't but a week ago I thought market bears wanted to see the 
group make a bold move above the 76 level for confirmation of 
further doom and gloom for the market averages.  However, as 
quick as things seem to change, it could be a gold stock decline 
that hints of a renewed rally for the major market averages.

I kid you not.  This is a "fitted" retracement that I've had in 
place on the Gold/Silver Index (XAU.X) for several months.  While 
the major market averages were "hanging on by a thread," it may 
be gold stocks that are dangling at the end of a rope.

Gold/Silver Index Chart - Daily Interval


 

My personal observations from recent trading in some gold stocks 
is that there are some FORMIDABLE shorts at XAU.X 76.  For a 
couple of days last week, there really appeared to be some 
willing sellers in Newmont Mining (NEM) $26.88 -2.29% just below 
$30.  Whey are they (the market) selling a "defensive" gold stock 
with "attack on Iraq" in the wings and gloomy economic data?  
Maybe the sector was just overbought and needed a little pullback 
for another leg higher.

The XAU.X now comes under my "microscope" as a sector to monitor 
near-term as a sector that would DIVERGE from the major markets.  
One thing I think traders need to be careful of are the "traps" 
that the XAU.X tends to build to suck traders into a move 
(bearish and bullish).  Notice how "little" daily declines to the 
left of the chart sucked in shorts.  If you were an SPX trader 
using the XAU.X as a DIVERGING index and went BULLISH the SPX on 
a daily break lower in XAU.X on March 8 (first Trap), chances 
are, an SPX bull that went bullish on March 8th at SPX 1,160 got 
trapped that day.

Near-term, I want to monitor the XAU.X.  My thinking is that 
tomorrow, we might see the XAU.X create a little spike lower, 
right below the 50-day MA.  A technician would be tempted to 
short that right?  Maybe, but not a large position if he/she 
looks back to the left of the XAU.X chart and my first labeled 
"trap" when the XAU.X briefly pierced below its 50-day SMA, when 
stochastics were "oversold" and MACD was approaching the zero 
level.  Current technicals from the 50-day SMA and oscillator 
create an almost "identical" setup in the XAU.X.

So let's tie in that March 8th date (a Friday) and quick rebound 
in the XAU.X on March 11th, which built a trap for gold bears, 
but also perhaps hinted a trap for equity bulls in the SPX.

A trader looking for a bearish entry point in the SPX may well 
have to use the XAU.X near-term to build some conviction for a 
bearish trade.  I personally am not looking for ANY trade in the 
S&P's currently, but those that are determined to trade, this may 
be useful.

S&P 500 Index Chart - Daily Interval


 

Oooooeeee!  It's pretty easy to be thinking... "short a rally 
back near 856," but when the S&Ps stage a 4% rally, it can test a 
bear's resolve can't it?  While I'll be watching the XAU.X, bond 
YIELDS and several other "key stock" like MSFT, I think a bearish 
trader in the SPX might look to short/put near tomorrows close if 
the XAU.X is down less that 2% and the SPX is up less than 2%.  

I don't know what stock futures are going to be in the morning, 
but right now, I consider tomorrow kind of an "observation" day 
for an SPX trader and not looking for a trade until Thursday.  A 
bear that has been waiting patiently for a rally can look short 
the SPX, but for right now, I'd have to say you need to take some 
heat back to the 21-day SMA of 867 and/or 61.8% retracement of 
880.  If you can't take that kind of heat, then stay out of the 
kitchen near-term.

In anticipation of a question like... Jeff:  How do you come up 
with "if the SPX is trading up marginally (less than 2%) .... 
then we might revisit last night's Index Trader's wrap and 
comments regarding the S&P 100 Index Chart (OEX.X) 425 +4.54%.

S&P 100 Index Chart - Daily Interval


 

An "oscillator" trader looking at stochastics and MACD is 
thinking "??????" as in what the heck is going to happen here?  
Have commercials been right all along (see last night's wrap 
discussion) and the OEX and SPX are due for a massive rally?  Or 
will commercials be looking for bearish entry points at our 420-
430 range to get short on weaker than expected economic data?  

I'm rather 50/50 right now and would like to use tomorrow as an 
observation day.  To be truthful, if volatility weren't so high 
and option premiums high, I'd like a straddle or strangle trade 
in both the OEX, using the OEX 425 level as my "at the money" 
strike.  When I look at a November 425 straddle (calls/puts) I'm 
looking at calls=$23.50 + $20.20 puts for a total of $43.70.  
From 425 I need an OEX move of 43.7 points either side of 425 and 
just not sure I'd get it at this type of price.

Dow Industrials Chart - Daily Interval


 

While the Dow sputtered in the early morning, it did hold onto 
gains despite some weakness in the NASDAQ.  However, bullishness 
began to build as the session progressed and that bullishness 
sure seemed to lift the psychological spirits of investors, if 
not at least move some technology bears into short covering.  

I just can't get behind a BEARISH trade in the Dow Industrials, 
because under a bullish rally scenario, I think this is the place 
that that a bear finds the greatest amount of trouble and least 
amount of gain for that trouble.  I'm also getting more bullish 
on Dow component Johnson & Johnson (NYSE:JNJ) $56.30 +4.10%.  I 
discussed JNJ briefly in last night's wrap and in today's 01:00 
PM intra-day update.

Heck... if a bullish equity trader is willing to risk $5 in a JNJ 
bullish trade with a stop at $51 on the point and figure chart, 
then a Dow Diamonds (DIA) $80.00 should be willing to risk a stop 
below Monday's low of $74.60.  Heck, better yet, a DIA November 
$80 call (DAVKB) is $3.80 and that would be LESS RISK than an 
underlying DIA bullish trade with a stop at $74.50.  

DON'T GO CRAZY and buy 100 contracts!!!!!  Take 1/4 bullish 
position at first.  Then if we begin to see the Dow Industrials 
Bullish % ($BPINDU) begin to reverse higher and get some 
confirming bullishness from the SPX and OEX bullish % charts, 
then a bull can begin rounding out a DIA position.

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


 

Things were actually looking decent for bears in the QQQ this 
morning, despite some early bullishness in the Dow, SPX and OEX.  
It wasn't until approximately 01:30 PM EST, that the QQQ hit a 
shorter-term bearish trader's stop of $21.10.  I'm kind of like a 
horse that will keep going back to the same well for a refreshing 
drink of water.  With a series of lower lows and lower highs and 
my fundamental thought that technology stocks are so far down the 
food chain in the scope of seeing any capex spending increases 
from the bigger cyclicals and more deeper rooted economy stocks, 
I'm still bearish the QQQ's and looking for rally's back near 
$22.21 to $22.97 and bearish entry points.

True... if you're a disciplined trader and can watch things on an 
hourly basis, then you can trade the Q's bullish and bearish on 
the swings.  

I think the Q's might have some potential back to the $22.85 
level, but its going to take some further bullishness from the 
Dow, SPX and OEX to get them there.  If we start seeing 
bullishness wane near $22.21 and MACD on the 60-minute chart 
begins to roll, then I like QQQ short once again, stop just above 
retracement of $22.97 and look for another 52-week low.

If you know of any technology stocks that have manufacturing 
facilities in overseas markets, but derive the bulk of their 
sales here in the U.S. (and they're still trading over $10) send 
me an e-mail.  If a technology bull thinks he/she has had a tough 
go of it the past two years, then continued delays in labor talks 
and west-coast shipping ports being shut down isn't going to make 
things any easier. 

Jeff Bailey


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

Balancing Act
by Steven Price

Do you believe?  Does it matter?  The Dow rebounded 346.86 points 
today to close at 7938.79.  Much of the rally was credited to the 
agreement between Iraq and weapons inspectors on where the 
inspectors would be allowed in the country.  While the specter of 
war seems to be on hold for the moment, oil futures remained 
high, due to fears that Hurricane Lili will disrupt oil 
production in the Gulf of Mexico.  December Crude Oil Futures 
stayed over $30 per barrel, finishing the day at $30.33 (+0.06).

The fact that the Dow rally fell short of 8000 still maintains 
the series of lower highs and lower lows since the index rolled 
over on August 23 breaking back below 9000.  I'll reiterate my 
earlier point that even a bear market rally can last a few 
hundred points, after a 1500-point drop.  8000 served as 
resistance last Thursday, as well, before we hit a new recent 
intraday low of 7460.78 on Monday.  This low was below the 
intraday low on the morning of July 24 (7532.66), and any rally 
that does not break the trend can be assumed to be temporary.  
What would change my mind?  A break in the trend.  The September 
3 low of 8304.44 was the first signal that the Dow's August rally 
was ending, as it constituted the first lower low since July 24. 
The rally on September 11, that led to a high of 8726.90, before 
sinking lower the next few days, constituted a lower high, as 
well, and confirmed the trend break and the fact that we were 
heading lower.  A close above 8000 would be a break in the 
current downtrend, and could be the signal that we have finally 
found a bottom.  The other evidence for a bottom is that we have 
bounced around the 7500 level three times now.  

Some of the economic news this morning looked negative.  The ISM 
index fell to 49.5, indicating a contraction in manufacturing.  
Purchasing managers were concerned about energy prices and the 
possible impact of a war with Iraq.  Although the index came in 
below expectations, some of the internal numbers within the 
report actually were better than expected.  Construction spending 
also fell 0.4% in August.  On the positive side, the pace of 
layoffs also decreased.  Corporate job cuts fell to a 22-month 
low of 70,057 in September.  This was 40% below August's number 
of 118,067 and 72% lower than September 2001.

After the close, Dell gave the market a boost by increasing its 
third quarter revenue forecast.  It now predicts sales of $9.1 
billion, a $200 million increase from previous forecasts and 22% 
ahead of September 2001.  It also expects earnings to be at the 
high end of previous estimates.  This may give us the boost we 
need for the above mentioned trend reversal.  The concern from 
where I'm sitting is that CEO Michael Dell said the company was 
able to increase forecasts due to growth in products other than 
PCs, which still remain weak.  He cited storage systems and 
servers.  I'd be much more bullish if the increase was due to an 
upturn in PC demand.

Tomorrow should be pivotal, as we get another look at the 8000 
mark in the Dow.  A failure at this level will be bearish, while 
a close above the recent highs could lead to a trend reversal.  
We will still need to see an increase in business spending before 
a real rally is sustainable, but an intermediate rally may 
provide some good long opportunities in the short term. 


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7532
Current     :  7938

Moving Averages:
(Simple)

 10-dma: 7872
 50-dma: 8414
200-dma: 9518



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  847

Moving Averages:
(Simple)

 10-dma:  839
 50-dma:  886
200-dma: 1035



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  843
Current     :  870

Moving Averages:
(Simple)

 10-dma:  863
 50-dma:  928
200-dma: 1243



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

The Semiconductor Index (SOX.X): If the Nasdaq rally is for real, 
this group, which reflects both business spending and PC sales, 
will need to crack 250.  It came close today, finishing at 
249.90, but the fact that the rally fell short of this number can 
be seen as significant.  After Dell raised guidance after the 
close, we should see this level broken tomorrow, but just how 
long it can hold will be the question.  Dell attributed its 
higher revenues to areas outside PC demand, so the market may not 
react as strongly as it would if that were the case.  A close 
over 260 would break the current series of lower highs and lower 
lows, so if we break the 250 level, look for similar resistance 
at 260 to be broken before considering long plays in the group.

52-week High: 657
52-week Low : 236
Current     : 249

Moving Averages:
(Simple)

 10-dma: 247
 50-dma: 300
200-dma: 461

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

Market Volatility

The VIX took a steep dive today, losing almost 10% in one day.  
However, it remained above 40, which is still a high level, on a 
day when the Dow rallied over 300 points.  The Nasdaq Volatility 
only gave up a point, as well.  The fact that both of these 
numbers remain high shows that option traders have not yet bought 
into the rally.  This includes institutions that make a habit of 
selling large amounts of premium when they feel it is overvalued.  
Look for a VIX in the low 30s to indicate that market 
participants believe a rally will be long term.  

CBOE Market Volatility Index (VIX) = 40.13 -4.44
Nasdaq-100 Volatility Index  (VXN) = 57.24 –1.11

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.87        520,943       452,989
Equity Only    0.67        134,916       202,761
OEX            1.19         31,137        39,287
QQQ            0.46         39,103        27,308

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

Bullish Percent Data

           Current   Change   Status
NYSE          33      + 0     Bull Correction
NASDAQ-100    19      - 3     Bear Confirmed
Dow Indust.   10      - 7     Bull Correction
S&P 500       27      - 3     Bear Confirmed
S&P 100       20      - 5     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   1.31
10-Day Arms Index  1.44
21-Day Arms Index  1.48
55-Day Arms Index  1.35

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

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

Market Internals

        Advancers     Decliners
NYSE       1925           834
NASDAQ     1809          1439

        New Highs      New Lows
NYSE         51             112
NASDAQ       34             268

        Volume (in millions)
NYSE     1,994
NASDAQ   1,696


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

Commitments Of Traders Report: 09/24/02

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 reduced long and short positions, however ended up 
with a net 10,000 fewer short contracts.  Small traders reduced 
both positions, as well, but shortened up their net long 
positions by 14,000 contracts.


Commercials   Long      Short      Net     % Of OI 
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%)
09/24/02      425,276   442,661   (17,385)   (2.0%)

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
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%
09/24/02      124,232    73,506    50,726     25.7%

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

Commercials reduced long and short positions, but got decidedly 
shorter, by a total of 4700 contracts.  Small traders also 
reduced positions, however stayed close to flat overall.


Commercials   Long      Short      Net     % of OI 
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%)
09/24/02       46,637     54,613    (7,976) ( 7.9%)

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
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%
09/24/02       11,163     9,421     1,742     8.5%

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

DOW JONES INDUSTRIAL

Commercials reduced positions dramatically on a percentage basis, 
but got longer overall, by 3200 contracts.  Small traders also 
reduced positions, but flipped from the long side to short 
overall.

Commercials   Long      Short      Net     % of OI
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%
09/24/02       18,951    10,074    8,877      30.6%

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
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     1,756      7.0%
09/24/02        7,939     9,453    (1,514)   ( 8.7%)

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

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


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******************
WEEKLY FUND SCREEN
******************

Low-Risk/Expense Health Funds

This week, we screen for health sector funds with below average 
risk and expenses relative to their category peers.  Funds with 
loads and no-load structures will be included in the screen; so 
if you're a direct investor, your focus may be on funds with no 
loads, and if you work with a financial advisor, your focus may 
be on load funds with different classes.  We'll use the Class A 
shares for comparison purposes since the expense ratios usually 
are lower on the Class A shares than other classes of the fund.  

Below-average risk means health sector funds that have produced 
low volatility (standard deviation) over the trailing 36 months.  
According to Morningstar, the average health sector fund has an 
annualized 3-year standard deviation of 31.7%, much higher than 
the average U.S. diversified stock fund (22.3%).  Fund with the 
lowest volatility in the health sector have standard deviations 
in the 14% to 18% range, per Morningstar's Quickrank tool.   

Below-average expenses means health funds with low expenses per 
annum as reflected by their expense ratios.  The average health 
sector fund has an annual expense ratio of 1.76%.  The low cost 
leader in the category, Vanguard Health Care (VGHCX), boasts an 
annual expense ratio of 0.31%.  Assuming an annual gross return 
of 10%, Vanguard's fund would produce a "total return" of 9.69% 
versus the category average of 8.24% (10 percent less the 1.76% 
in expenses).  Funds with high expense deficits to overcome are 
more likely to take excessive risk than funds with low expenses 
(which can afford to pursue a lower-risk strategy).  

In addition to considering a fund's total return, we'll look at 
how consistent those returns have been and how well the manager 
has preserved capital in the recent downturn using Lipper data.  
Morningstar rates funds against their category peer group while 
Lipper scores funds against all funds in their broad peer group.  
We'll also consider the fund company, portfolio characteristics, 
expenses, manager tenure, and other factors.

Screening Process

We begin with Morningstar's Fund Selector (www.morningstar.com), 
using the following initial set of criteria:

 Morningstar Category = Specialty/Health
 Manager Tenure > or = Category Average
 Minimum Initial Purchase < or = $3,000
 Expense Ratio < or = Category Average
 Star Rating = 4 Stars or 5 Stars 
 Morningstar Risk = Below Average or Low
 YTD Return > or = Universe Category
 3-Year Average Return > or = Category Average
 5-Year Average Return > or = Category Average

Only one fund passed this initial screen test, Merrill Lynch 
Healthcare Fund managed by Jordan Schreiber since April 1983.  
Surprisingly absent on the list was Vanguard Healthcare Fund 
managed since May 1984 by Edward Owens, Wellington Management 
Company.  The $15.1 billion Morningstar 5-star rated category 
giant has followed a well-diversified approach to produce top 
returns over time, and boasts one of the best risk-and-reward 
tradeoffs in the category.  It also has low expenses and high 
tax-efficiency.  For now, our list consists of two funds.

We turned to Lipper's Lipper Leaders screener next, found at 
www.lipperleaders.com.  Due to recent modifications, one can 
screen funds now on total return, consistency of performance, 
preservation of capital, tax efficiency and expense.  We set 
Lipper's screener to give us the leaders for preservation and 
expense, and choose to display fund results by total return. 

The Lipper screen yields two results, Vanguard Healthcare Fund 
(VGHCX) and Fidelity Select Health Portfolio (FSPHX).  Sibling 
Fidelity Advisor Health Portfolio is also on the list, but our 
primary focus is on the retail class shares (FSPHX).  Fidelity 
Management & Research Co., like Wellington Management Co., is 
known for its research capability, but current manager, Steve 
Calhoun, has been the fund's manager only since March of 2002.  
Our list remains at two funds -- Merrill Lynch Healthcare and 
Vanguard Healthcare.

We opt to stop here, rather than drill down further, since the 
two fund companies have strong reputations in the business and 
the individuals responsible for managing the fund's assets are 
seasoned veterans of the healthcare sector.  In volatile times, 
experience counts.

Merrill Lynch Healthcare Fund, Class A (MAHCX)

 Pertinent Statistics:
 Manager: Jordan Schreiber, MLAM (April 1983)
 Net Assets = $311 Million
 Morningstar Rating = 4 Stars
 Morningstar Risk = Below Average
 Expense Ratio = 1.27%
 YTD Return = -22.0% (21st Percentile) 
 3-Year Average Return: +7.6% (37th Percentile)
 3-Year Standard Deviation: 20.7%  
 Lipper Leader = Preservation 

Merrill Lynch Healthcare Fund seeks long-term capital growth by 
investing in equities issued by companies producing health-care 
products and services, domiciled primarily in developed markets. 
This offering may invest up to 15% of assets in venture-capital 
investments, and is SEC-registered as "non-diversified" status.




 


Merrill Lynch Healthcare Fund has lost about 22% since December 
31 compared to losses of 27.5% for S&P 500 index and 31.9% for 
the category average per Morningstar.  Although negative, fund 
performance this year ranks in the category's top quartile and 
over the trailing 5-year period ranks in the top 5% within the 
health sector fund group.  The fund is a Lipper Leader for its 
ability to preserve capital in down markets.  

The fund's volatility is below that of the S&P 500 index and is 
well below that of the category average as measured by standard 
deviation.  At 1.27%, the fund's annual expenses are considered 
below average for the category.  All things considered, Merrill 
Lynch Healthcare Fund's moderate approach has produced a decent 
risk-return tradeoff for investors, and is a suitable choice in 
the health category.

Vanguard Healthcare Fund (VGHCX)

 Pertinent Statistics:
 Manager: Edward Owens, Wellington Management Co. (May 1984)
 Net Assets = $15.1 Billion
 Morningstar Rating = 5 Stars
 Morningstar Risk = Low
 Expense Ratio = 0.31%
 YTD Return = -15.8% (3rd Percentile) 
 3-Year Average Return: +11.2% (11th Percentile)
 3-Year Standard Deviation: 15.1%  
 Lipper Leader = Return, Preservation and Expense

Vanguard Healthcare Fund seeks long-term growth of capital by 
normally investing at least 80% of net assets in the stocks of 
companies engaged in the development, production or distribution 
of products and services related to the treatment or prevention 
of diseases and other medical infirmities.  The fund's universe 
includes pharmaceutical and medical-supply companies as well as 
firms that operate hospitals and other health facilities.  Fund 
manager Edward Owens (Wellington Management Company) may invest 
up to 30% of assets in foreign securities. 




 



Since December 31, Vanguard Healthcare Fund has lost only 15.8% 
compared to a 30.9% YTD loss by the average health sector fund, 
per Morningstar.  While negative, manager Edward Owens YTD 2002 
performance ranks in the category's top 3%.  This offering is a 
"1" (Lipper Leader) in four categories: total return, consistent 
return, preservation and expense.  

Vanguard's fund also sports one of the lowest volatility levels 
in the category.  The fund's trailing 3-year standard deviation 
of 15.1% is less than half the category average per Morningstar.  
At 0.31%, the fund's expense ratio is pale in comparison to the 
average health sector fund (1.76%), offering its shareholders a 
true cost advantage.

Owens performance over the last five and 10 years is unmatched, 
ranking in the category's top 1% per Morningstar.  His trailing 
5-year average total return of 13.9% through September 30, 2002 
was 15.5% better than the market (S&P 500 index) and 9.7% above 
the category average (4.2%).  The fund's 10-year average return 
of 18.7% was nine full percentage points better than the market 
(S&P 500 index) and 6.5% greater than the category average, per 
Morningstar.

Long-term investors seeking broad health sector exposure have a 
superior "return to risk and expense" choice here.

Conclusion

The only health sector fund close to matching Vanguard Health 
Care Fund's 18.6% average total return for the past decade is 
Eaton Vance Worldwide Health Sciences, Class A (ETHSX), which 
returned 16.8% a year on average the past ten years.  It is a 
Lipper Leader for total return, and a "2" for preservation of 
capital (better than average in that regard).  Manager Samuel 
Isaly has managed the Eaton Vance offering since August 1989.

Because of the specialized "non-diversified" nature of sector 
funds, volatility and expenses can be high.  We tried in this 
week's screen to identify top funds with low risk and expense.  
They should appeal to long-term investors seeking exposure to 
health/biotech stocks and a more moderate investing approach.  
For more information or prospectus, please visit the relative 
fund company's website.  

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

I Hate When This Happens

The markets lulled traders to sleep after the morning volatility 
and left those still awake too glazed over to see what was 
happening. 

Slow gains with plateaus every 50 points kept shorts thinking the 
end was near when in reality they were just getting led down the 
path to slaughter.


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The Option Investor Newsletter                  Tuesday 10-01-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: None
Dropped Puts: BSC, FNM, KSS, FDX, SPC
Daily Results
Call Play Updates: None
New Calls Plays: ITMN, GSX
Put Play Updates: CI, GM, TECD
New Put Plays: QLGC, BAX, FLIR


****************
PICKS WE DROPPED
****************

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


CALLS:
*****

None


PUTS:
*****

BSC $58.24 +1.84 (+1.78 for the week) Bear Stearns rallied with 
the rest of the market today.  The financials followed the relief 
rally and put BSC right at the top of its recent range.  While we 
can't see a golden future for any of these financials, the 
repeated bounce at $55 has convinced us to close BSC and wait for 
a break below that level to reconsider the short play.  The 
market drop through the month of September is likely to reveal 
another significant outflow from stock funds and when those 
numbers are released, look for renewed selling across the sector.

---

FNM $65.22 +5.68 (+3.71 for the week) Fannie Mae looked like a 
great pick on Monday, but leave it to an unexpected pre-
announcement to ruin a good play.  FNM announced this morning 
that they had narrowed their duration gap from 14 months in 
August to 10 months in September.  This move helped reduce its 
interest rate risk, which had increased greatly from July to 
August, due to the rash of mortgage refinancing.   While the 
company normally releases this information toward the middle of 
the month, the added press it has gotten in regard to its 
increased risk convinced FNM to release the figures early.  The 
rebound took us out of our stop at  $63.25, and we will watch for 
future developments in the asset to liability relationship in the 
future.

---

KSS  $63.00 +2.19 (-1.09 for the week) Kohl's Corp was originally 
entered at $64.09 and headed south quickly on Monday.  After this 
morning's drop, we lowered our stop loss on the play, on this morning's 
Market Monitor (10:47:45), to $61.25.  KSS's drop followed bad news 
from Wal-Mart and Federated, as well as a profit warning from 
Aeropostale, citing empty malls.  However, the rising tide lifted 
almost all boats this afternoon and took us through our stop.  Even 
with the previous stop, the action of the past two days looks like we 
may have seen a reversal pattern.  For the moment, we will close this 
play with a small profit, and look for another round of selling as we 
head into the holiday season.  

---

FDX $52.43 +2.36 (+1.98) After its sharp reversal at the 200-dma
last Friday, FDX looked like a great retracement candidate.
While the stock did drop as low as $48 on Monday, it really
wasn't a tradable move, as most of the drop came from the opening
gap.  The late-day rally wiped out most of the day's loss and
then the bulls really got serious on Tuesday afternoon, tacking
on better than 4.7% by the closing bell.  FDX closed above both
last Friday's high and the 200-dma.  While our $53 stop hasn't
been violated yet, FDX is showing too much strength for us to be
comfortable with keeping it on the playlist.  Use any early
weakness on Wednesday to exit open positions.

---

SPC $30.03 +1.31 (+1.24) While Monday's rally attempt looked
like a great bearish entry point into our SPC play, Tuesday's
strong rally proved the fallacy of that conclusion.  As the broad
market powered higher on the first day of a new quarter, the
stock plowed through the $29 resistance level and actually
crested $30 at the end of the day.  While there is still
significant overhead resistance between Tuesday's close and our
$31 stop, the tide appears to have shifted.  Note how SPC never
was able to break down under the $27 level, so it failed to
generate a fresh PnF Sell signal.  With the strong rebound into
the close today, the prudent course of action is to drop the
play and look focus on more attractive candidates.


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

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

CALLS              Mon    Tue

GSK      40.49   -0.04   2.06  New, Great pipeline
ITMN     33.39    0.73   1.17  New, Steady and solid


PUTS               

BAX      29.62   -0.87  -0.93  New, Losing support
BSC      58.24    0.35   1.84  Drop, in congestion
CI       73.49   -0.75   2.74  still in the trend
FDX      52.43   -0.38   2.36  Drop, positive comments
FLIR     34.55   -2.77  -0.44  New, weekly drop
FNM      65.22   -1.98   5.68  Drop, narrowing the gap
GM       40.64   -0.10   1.74  still has problems
KSS      63.00   -2.29   2.19  Drop, profits
QLGC     25.25   -0.95  -0.79  New, weak relative strength
SPC      30.03    0.47   1.31  Drop, broken trend
TECD     27.94   -0.81   1.51  dead cat bounce


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

None


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

ITMN - InterMune - $33.99 +1.17 (+2.26 for the week)

Company Summary:
InterMune is a commercially driven biopharmaceutical company 
focused on the marketing, development and applied research of 
life-saving therapies for pulmonary disease, infectious disease 
and cancer.

Why We Like It:
InterMune has been one of the few biotechs to experience a 
consistent, daily increase in recent weeks.  As the overall 
market has tanked, and the Biotech Index (BTK.X) has been 
swinging in both directions, ITMN just keeps adding green 
candles.  One of the reasons for this is the results from a 
recent study regarding its idiopathic pulmonary fibrosis 
treatment, Actimmune.  The drug did not accomplish its primary 
goal, of slowing the progression of the disease. The disease is 
debilitating and fatal and current treatments do not do much to 
help.  However, Actimmune actually prolonged the life of patients 
with milder forms of the disease, as compared to those taking a 
placebo.  The fact that it did not accomplish its primary goal 
may have kept the stock from soaring, but prolonging life in 
patients is what doctors primarily care about.  Dr. Robert 
Strieter, chief of pulmonary and critical care medicine at UCLA 
Medical Center, said "No drug that we currently use shows any 
survival advantage or improvement in lung mechanics, so if the 
Actimmune data holds true, the results will be very profound.  
We'll be medically obligated to treat all IPF patients with 
Actimmune."   Accredo Health (ACDO), the drug distributor that 
handles Actimmune, said the demand for the drug is strong and 
that insurance reimbursement doesn't appear to be a problem.

In addition to the Actimmune activity, ITMN and Eli Lilly also 
reached a settlement on royalty payments relating to future 
worldwide sales of oritavancin.  ITMN has said it is making 
progress on the drug, and the effectiveness of the skin and soft 
tissue treatment for infections has been demonstrated in Phase 3 
trials. 

ITMN recently crossed its 200-dma of  $30.11, and also registered a 
point and figure double top breakout buy signal at $32.  The fact that 
the rally at the beginning of September was turned back at the 200-dma, 
found support and then broke through on the next effort shows increased 
momentum.  Volume has been heavier on the upside breakout, and the 
stochastic and MACD oscillators are still on a buy signal.  
Conservative traders can wait for a pullback above the 200-dma and then 
focus on the $30 strike price.  We will initiate a long position at the 
current level, and set our stop at $29, just below the low of the day 
on the 200-dma breakout.

BUY CALL OCT-30*IQY-JF OI= 3672 at $5.10 SL=2.70
BUY CALL OCT-35 IQY-JG OI= 1539 at $1.80 SL=1.00
BUY CALL NOV-30 IQY-KF OI=   17 at $6.20 SL=3.10
BUY CALL NOV-35 IQY-KG OI=   61 at $3.10 SL=1.60

Average Daily Volume = 1.46 mil


---

GSK - GlaxoSmithKline - $40.49 +2.06 (+1.63 for the week)

Company Summary:
GlaxoSmithKline, with U.S. operations in Philadelphia and 
Research Triangle Park, NC, is one of the world's leading 
research-based pharmaceutical and healthcare companies committed 
to improving the quality of human life by enabling people to do 
more, feel better and live longer. (source: company release)

Why We Like It:
GSK has released a series of positive studies in regard to 
infectious disease treatments.  On Friday, it release results of 
two such studies.  The first showed that its once a day antiviral 
drug Valtrex, reduced transmission of symptomatic genital herpes 
by 77% in healthy heterosexual monogamous couples.  It also 
reduced acquisition of the virus by 50%.  The fact that Valtrex 
is given only once a day should make it a darling of doctors, who 
strive to find therapies that require less dosing.  Patients are 
more efficient when they are required to take medication fewer 
times daily.  The company also released findings for its HIV 
protease inhibitor 908.  The study showed that the drug achieved 
a higher rate of undetectable viral load in patients than 
Pfizer's Viracept.  GSK said 73% of patients treated with the new 
drug had an undetectable viral load at 24 weeks, compared with 
54% of patients taking Viracept.  

The recent news, along with the rise in the drug sector today, 
gave GSK a push through a couple of significant levels.  The 
stock blew through both its 50-dma ($38.56) and 100-dma ($40.06), 
which coincided with round number resistance of $40.  One of the 
keys for this play will be whether BSK can hold above $40.  The 
other key will be how the stock reacts at the $41 level.  $41 is 
the level at which point and figure bearish resistance is 
located.  The has terrific momentum at the moment, having crossed 
the above mentioned moving averages and showing buy signals on 
both stochastic and MACD oscillators.  Traders should look for 
support at $40 on a pullback, or a break of $41 if the market 
continues its upward momentum.  Conservative traders should wait 
for a trade of $42, which will constitute a breakthrough of 
bearish resistance on the PnF chart.  We will place our stop loss 
at $37, below the 50-dma and lows of the day at the end of last 
week.

BUY CALL OCT-40   *GSK-JH OI= 1115 at $1.95 SL=1.00
BUY CALL OCT-42.50 GSK-JV OI=  441 at $0.80 SL=0.00
BUY CALL NOV-40    GSK-KH OI= 2158 at $2.85 SL=1.40
BUY CALL NOV-42.50 GSK-KV OI= 1134 at $1.65 SL=0.00

Average Daily Volume = 1.15 mil



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

CI $73.49 +2.74 (+1.53) Just when it looked like CI was finally
going to break down under the $70 level on Monday, timid buyers
came to the rescue, propping the stock higher into the close.
Tuesday's afternoon ramp job drove the stock right back up near
the highs from late last week.  Tuesday's rally had the feel of
a continuous short-covering rally, and due to its poor
performance the Insurance sector (IUX.X) really got into the act
this afternoon, launching higher by nearly 5%.  Since CI broke
below $75 over a week ago, this level has been acting as
formidable resistance.  Should this rally attempt fail below
$74.50, it should make for another solid entry point into the
play.  Risk should be very easy to manage with entries near this
level, as our stop is set at $74.75, right at the intraday highs
from last week.  If looking to open new positions on the next
failed rally, watch for confirmation from the IUX index failing
to push through the $255 resistance level.  Traders that only
want to take a position after renewed weakness shows itself,
will want to see a drop back under the $72 level before playing.

---

GM $40.64 +1.74 (+0.85) If there was any question about whether
the zero-percent financing incentive was losing its luster, GM's
release of September sales data certainly pointed to a
significantly weaker auto market.  GM announced that its U.S.
sales fell a whopping 13%, partially due to a brief pullback in
its interest-free financing offer.  Now, not only has the
incentive been reinstituted, but has been extended to most 2003
vehicles.  With the other domestic manufacturers following suit,
it is clear that zero-percent financing is a habit that the auto
manufacturers can't afford to kick.  The question becomes whether
this reality will continue to pressure shares of GM.  After
confirming support just above $38, GM rocketed higher with the
rest of the broad market.  Up until the final 20 minutes of the
day, it looked like the bulls might push through our $41 stop.
But a bit of rationality prevailed into the close, keeping our
play alive to fight another day.  Both the broad market and GM
are looking a bit toppy after this strong rally, and a failure of
the rally near $41 could make for a great entry point.  Just be
sure to follow it up with a firm stop, in order to control risk.
More cautious traders will want to see a drop back under $40
before opening new positions.

---

TECD $27.94 +1.54 (+0.69) After a fairly quiet start to the day,
Tuesday's session turned into a serious bullish party, with even
the out-of-favor NASDAQ-100 tacking on a healthy 4.5%.  We've
been playing TECD to the downside ever since it broke important
support up at $30, and despite a nearly 6% short-covering rally
on Tuesday, the stock remains well below that level.  However,
we need to be careful right here, as the stock closed out the day
just below its high and could be in the process of turning
around.  We'll need to see if this rally has any more gas in the
tank or if it finished its run on Tuesday.  DELL's positive
comments after the closing bell will likely give the Tech sector
another boost at the open, and aggressive traders will want to
watch for that rally to fail below resistance.  For TECD,
resistance is looming overhead at $29 (also the site of the
10-dma) and a rollover below that level can be used for new
entries.  A push slightly higher before the rollover is also
acceptable, as there is strong resistance near $30.  More
conservative traders will need to see TECD fall back under
$27.25 before adding new positions.  Keep stops set at $30.


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

QLGC - QLogic -  $25.25 -0.79 (-1.71 for the week)

Company Summary:
QLogic Corporation simplifies the process of networking storage 
for OEMs, resellers and system integrators with the only end-to-
end infrastructure in the industry, consisting of controller 
chips, host bus adapters, network switches and management 
software to move data from the storage device through the fabric 
to the server. QLogic designs and produces solutions based on all 
storage network technologies including SCSI, iSCSI, InfiniBand 
and Fibre Channel. A member of the S&P 500 Index, QLogic was 
recently ranked number 25 on Forbes' Best 200 Small Companies and 
number 20 on Fortune's 100 Fastest Growing Companies. (source: 
company release)

Why We like It:
Poor relative strength is just part of the story here.  On a day when 
the Nasdaq screamed higher by 41.66 and the Dow added 346.86, QLogic 
actually lost -0.79.  The Semiconductor Sector Index (SOX.X) had given 
up 35% of its value since the middle of August, but recently found 
support.  For that reason, we were looking for a rollover in the index 
before shorting semiconductor related stocks.  However, a couple of 
things developed today that has soured us on QLGC.  First, the SOX was 
stopped below 250, finishing the day at 249.90.  The intraday chart 
shows several attempts to get above 250 turned back solidly during the 
end of day rally. This indication of sellers at this previous support 
level shows bearish sentiment still present in the sector and the 
possibility of a dead cat bounce from the recent low of 230. That will 
most likely change in the morning after Dell raised its revenue 
guidance, however, that may simply give us a better entry point on 
QLGC.

QLGC had achieved its point and figure bearish vertical count 
when it traded $27.  We profiled it this weekend in "Ask the 
Analyst," highlighting support at that level, as well as a bounce 
from the bottom of its descending channel. A view of the charts 
can be found with this link 
http://www.OptionInvestor.com/ask/092902_1.asp.  All of the 
support levels described in that column now appear to have 
fallen. Today's developments registered two key sell signals.  
First, we had a new PnF sell signal when the stock traded $26.  
It then added an additional box at $25.  The stock also broke 
through the bottom of its descending channel, as well as breaking 
through the $25.00 round number support intraday.  The next 
support level appears to be $20 for QLGC.  We will look for a 
bounce on Dell's news to provide an entry point below the 
previous support at $27.  Conservative investors can wait for a 
negative reading in the SOX before piling on.  If we do not get a 
bounce on the Dell news in the morning, then prospects for the 
sector look even weaker, and we would enter the play at the 
current level.  Place stops at $28, which would signal a break 
back above support and a 3-box PnF reversal.

BUY PUT OCT-30*QLC-VF OI= 5166 at $5.40 SL=2.70
BUY PUT NOV-25 QLC-WE OI= 1066 at $3.40 SL=1.70

Average Daily Volume = 13.8 mil


---

BAX – Baxter International $29.62 -0.93 (-1.79 this week)

Company Summary:
Baxter engages in the worldwide development, manufacture and
distribution of a diversified line of products, systems and
services used primarily in the healthcare field.  BAX's products
are used by hospitals, clinical and medical research laboratories,
blood and blood dialysis centers, rehabilitation centers, nursing
homes, doctor's offices and by patients at home, under physician
supervision.  The company manufactures products in over 28
countries and sells them in over 100 countries.

Why We Like It:
Relative strength or weakness is a powerful tool in pinpointing
solid trade candidates.  With the strong rally in the broad
markets on Tuesday, those stocks underperforming the overall
market stand out in even greater contrast.  The Pharmaceutical
index (DRG.X) staged a more than 4% rally on Tuesday after
successfully testing the $275 support level.  Our new play, BAX
demonstrated amazing relative weakness, by shedding more than 3%
on heavy volume, breaking below important support at $30 for the
first time since early 2000.  The stock has been posting a series
of lower highs since early April of this year, and today's break
below the $30 level looks like the early stage of a breakdown
from a bearish triangle.  Should the broad market rally fizzle
like all the other recent rallies have, renewed selling will
likely hammer BAX lower due to its demonstrated relative
weakness.  Our preference would be to get a failed rally near
resistance to before initiating new positions, but we'll clearly
have to take what the market offers us.  Note that the $33 level
appears to be formidable resistance, and this is backed up by the
20-dma ($33.03).  A rollover below this level, possibly as low as
the $30.75 or $32.25 intraday resistance levels.  Should the stock
continue to slide without rebounding, momentum entries can be
considered on a volume-backed drop below $29, as that would
correspond to a fresh PnF Sell signal.  Set stops initially at
$33.50, just above strong resistance.

BUY PUT OCT-30 BAX-VF OI= 496 at $1.80 SL=1.00
BUY PUT NOV-30*BAX-WF OI=1500 at $2.65 SL=1.25
BUY PUT NOV-25 BAX-WE OI=1149 at $1.05 SL=0.50

Average Daily Volume = 4.18 mln


---

FLIR – FLIR Systems $34.55 -0.44 (-3.10 this week)

Company Summary:
FLIR is engaged in the design, manufacture and marketing of
thermal imaging and stabilized camera systems for a wide variety
of commercial, industrial and government applications.  The
company's products are divided into two categories, which
include the thermography products and imaging products.  In the
Thermography division, FLIR manufactures products that are sold
to commercial, industrial, research and machine vision customers.
For industrial customers, FLIR has developed thermography
systems that feature accurate temperature measurement, storage
and analysis.  The Imaging division caters to military, law
enforcement, surveillance and security customers.

Why We Like It:
Along with it being one of the worst months for equity bulls,
October also ushers in tax-loss selling season for many funds, as
they look to balance gains against losses in their portfolios.
Clearly there aren't a lot of stellar winners this year, and even
stocks that have failed to rally strongly may be candidates for
October sales.  FLIR is one such stock due to the fact that it
hasn't fallen apart over the past 12 months.  While it hasn't
fallen apart, neither has it been a strong stock, as it has been
trapped under a descending trendline since April of this year,
posting one lower high after another.  The $35 level has provided
consistent support throughout the past year, but today's intraday
plunge to just above $33 broke that support and generated a fresh
PnF Sell signal.  The vertical count is pointing to an eventual
target of $29, so clearly the downside appears to be limited.
Following the recent breakdown, (despite the intraday rebound),
resistance looks firm at $36 and impenetrable in the $38-39
range.  Due to the sharp recovery from today's low, we want to be
very careful about entering on a breakdown.  It is easier to
manage risk in this play by fading a failed rally.  A rollover
near $36 makes sense for initial positions, although a bullish
failure near $39 certainly looks attractive.  Not only is this
the site of significant resistance over the past month, but it
is also the location of the long-term descending trendline and
the 50-dma.  After taking a position, target $29 to the downside
and set stops initially at $39.

BUY PUT OCT-35*FFQ-VG OI=260 at $2.45 SL=1.25
BUY PUT OCT-30 FFQ-VF OI=121 at $0.75 SL=0.25

Average Daily Volume = 300 K



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Contact Support
The Option Investor Newsletter                  Tuesday 10-01-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three: 

Play of the Day: Call - GSK
Traders Corner: Forex

**********************
PLAY OF THE DAY - CALL
**********************

GSK - GlaxoSmithKline - $40.49 +2.06 (+1.63 for the week)

Company Summary:
GlaxoSmithKline, with U.S. operations in Philadelphia and 
Research Triangle Park, NC, is one of the world's leading 
research-based pharmaceutical and healthcare companies committed 
to improving the quality of human life by enabling people to do 
more, feel better and live longer. (source: company release)

Why We Like It:
GSK has released a series of positive studies in regard to 
infectious disease treatments.  On Friday, it release results of 
two such studies.  The first showed that its once a day antiviral 
drug Valtrex, reduced transmission of symptomatic genital herpes 
by 77% in healthy heterosexual monogamous couples.  It also 
reduced acquisition of the virus by 50%.  The fact that Valtrex 
is given only once a day should make it a darling of doctors, who 
strive to find therapies that require less dosing.  Patients are 
more efficient when they are required to take medication fewer 
times daily.  The company also released findings for its HIV 
protease inhibitor 908.  The study showed that the drug achieved 
a higher rate of undetectable viral load in patients than 
Pfizer's Viracept.  GSK said 73% of patients treated with the new 
drug had an undetectable viral load at 24 weeks, compared with 
54% of patients taking Viracept.  

The recent news, along with the rise in the drug sector today, 
gave GSK a push through a couple of significant levels.  The 
stock blew through both its 50-dma ($38.56) and 100-dma ($40.06), 
which coincided with round number resistance of $40.  One of the 
keys for this play will be whether BSK can hold above $40.  The 
other key will be how the stock reacts at the $41 level.  $41 is 
the level at which point and figure bearish resistance is 
located.  The has terrific momentum at the moment, having crossed 
the above mentioned moving averages and showing buy signals on 
both stochastic and MACD oscillators.  Traders should look for 
support at $40 on a pullback, or a break of $41 if the market 
continues its upward momentum.  Conservative traders should wait 
for a trade of $42, which will constitute a breakthrough of 
bearish resistance on the PnF chart.  We will place our stop loss 
at $37, below the 50-dma and lows of the day at the end of last 
week.

BUY CALL OCT-40   *GSK-JH OI= 1115 at $1.95 SL=1.00
BUY CALL OCT-42.50 GSK-JV OI=  441 at $0.80 SL=0.00
BUY CALL NOV-40    GSK-KH OI= 2158 at $2.85 SL=1.40
BUY CALL NOV-42.50 GSK-KV OI= 1134 at $1.65 SL=0.00

Average Daily Volume = 1.15 mil



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

Forex
By John Seckinger
jseckinger@OptionInvestor.com

Most traders spend a considerable time analyzing both equity and 
fixed-income markets; however, now might just be the perfect time 
to focus on the currency markets.   

Let us begin with some fundamental questions.  

What is Forex?

Forex, or Foreign Exchange, can best be described as a cash 
inter-bank or inter-dealer market established in 1971 when 
floating exchange rates began to become more active (read: more 
liquidity).  The simplest definition of foreign exchange is the 
changing of one currency to another.  In comparison to the daily 
trading volume averages of $300 billion in the U.S. Treasury Bond 
market and the less than $10 billion exchange in the U.S. stock 
markets, the Forex market maintains volume of well over $1 
trillion per day.

The most active foreign exchange activity is the spot business 
between the dollar and the four major currencies (British Pound, 
German Mark, Swiss Frank, Japanese Yen), representing over 64% of 
activity.  The players include central banks, commercial banks, 
corporate customers, and brokers.  Note:  Commercial brokers 
conduct the largest volume of trading. It is important to realize 
that Forex does not have a centralized location for trading 
activity, differentiating themselves from currency futures.  



 

What is the difference between currency futures and foreign 
exchange?

In currency futures, the contract size is predetermined.  Futures 
traders exercise leverage by utilizing a performance bond or 
margin to control a futures contract. (Margin is money deposited 
by both the buyer and the seller to assure the integrity of the 
contract.)

Liquidity is extremely important when trading currencies, and it 
is a drawback that the futures market does have a set opening and 
closing time.  In contrast to the futures market, the spot Forex 
market is a 24-hour, continuous currency exchange that never 
closes.  There are dealers in every major time zone, in every 
major dealing center (i.e., London, New York, Tokyo, Hong Kong, 
Sydney, etc.) willing to quote two-way markets.  

What influences exchange rates?

The primary factors influencing exchange rates include the 
balance of payments, the state of the economy, technical 
analysis, as well as political and psychological factors.

Purchasing Power Parity (PPP), capital strength between nations, 
is the central factor that determines market momentum.  Needless 
to say, the ballooning deficit in the U.S. has taken its toll on 
the U.S. dollar.  In addition, fundamental economic forces such 
as inflation and interest rates constantly influence currency 
prices.  Governmental strength (“Full faith and credit”) will 
also impact currency price.  If the Government sends money 
overseas, or changes the interest rates (making it more or less 
attractive to foreigners), clearly prices will have to reflect 
such action(s).  

Getting to the dollar specifically, using 1991 as the benchmark 
($1.00), it is impressive how the value has decreased since the 
1820’s.  

1820-1850          $13.28 
1850-1875          $13.14 
1875-1900          $14.85 
1900-1925          $11.38 
1935                $9.91 
1945                $7.56 
1965                $4.31 
1975                $2.35 
1985                $1.26 
1991                $1.00

With the Dollar maintaining its 1.00 level for some time now, 
what are some reasons for the dollar’s decline?  For one, North-
East Asian central banks have turned away from US dollar foreign 
exchange reserves to buy euros, boosting the euro’s claim to 
become the world's second reserve currency. 

Central banks of China, Taiwan, Hong Kong and South Korea 
accumulated $66 billion (quoted in US Dollars) in foreign 
reserves in the first six months of this year, but they did not 
spend those reserves on US dollar assets.  Last year, the North-
East Asian central banks funded more than 20 per cent of the US 
current account deficit, but that pattern began to break down in 
the first quarter of this year.  As mentioned previously, money 
either fled to the euro or elsewhere.  
  
China actually became a net seller of US government bonds in 
April for the first time since August 2000.  Moreover, Hong 
Kong's purchases of US securities have dropped to their lowest 
levels since March 2000.  Taiwan, on the other hand, has 
traditionally spent close to 100 per cent of its reserves on US 
securities, but recently has reported net purchases of US 
securities near zero. 
  
On the other hand, the euro has witnessed inflows of up to 11 
billion in one month (April 2002).  Speaking of the euro, let us 
back track for a second.  On January 1, 1999 the euro came into 
existence as the single currency of 11 of the 15 member countries 
of the European Union (Austria, Belgium, Germany, Finland, 
France, Ireland, Italy, Luxembourg, Spain, Portugal and the 
Netherlands).  Besides the dollar, only the Deutsche mark and the 
Japanese yen played a significant international role before 
implementation of the euro.    

Note:  Dollars held outside the United States amount, basically, 
to an interest-free loan by foreign nations to the United States. 
It has been estimated that this saves the United States about $15 
billion in interest charges annually.  Therefore, the 
introduction of the Euro back in 1999 immediately raised concerns 
about the potential of losing part of that $15 billion dollars.  
This may have occurred somewhat (hard to find facts on interest 
charges saved); however, more importantly for the dollar was the 
fact that most primary commodities remained priced in dollars. 

Remember, what pressures the U.S. dollar (weak economic data, 
current account deficit) also pressures the euro.  With Germany 
basically in a recession and weakness in the UK showing little 
signs of letting up, the dollar should be able to maintain its 
world wide dominance for some time.  Note:  It is interesting 
that Japan is showing a trade surplus; regardless, banking 
turmoil clearly is keeping the yen at bay since it is hard to 
attract capital inflows.  

Time for some technical analysis.  We begin with a chart of the 
Euro, currently at 0.9830.  Following its launch, the euro 
proceeded to lose 30% after trading for a short nine months.  
Note:  Before 1999, the chart reflects the basket of the 11 
aforementioned countries currencies.  

Chart of the Euro


 

Clearly the 1.00 level is pivotal, and further weakness in the 
dollar (via a higher euro) could spell deflation in the U.S and 
send the euro back towards 1.17.  Furthermore, this would not be 
good for equities.  

Turning to the yen, the current 122.46 reading seems to be 
keeping the upward trend in tact, portending further weakness out 
of Japan.  Once above 130, rumors about possible BoJ intervention 
will likely take form.  If, on the other hand, the Yen is in the 
process of forming a right shoulder of a H&S formation, maybe 
focusing on a move under 115 makes more sense.  The objective 
would be for a test of near 105.  This would not be good for the 
Greenback.

Chart of the Japanese Yen


 

Speaking of the Greenback, a monthly chart shows the recent 
devaluation and current consolidation.  Below 108, the current 
reading remains neutral to slightly bearish.  As the chart 
implies, a move back above its 22 PMA (109) should be the 
catalyst for an accelerated interest in dollar denominated 
assets, including equities.  On the other hand, a break under 
104.50 could spell trouble.  

Chart of the US Dollar Index, Monthly  


 

I hope that you have gotten a general understanding of the Forex 
market.  Remember, in theory, higher dollar means higher stock 
prices.  Good luck.  


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