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Daily Newsletter, Monday, 10/21/2002

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The Option Investor Newsletter                   Monday 10-21-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Running On Empty
Futures Wrap: See No Evil?  How Long Can the Market Close Its Eyes?
Index Trader Wrap: 
Weekly Fund Wrap:  Stocks/Stock Funds Surge
Traders Corner: DOW Theory Confirmation? 

Updated on the site tonight:
Swing Trader Game Plan: One Giant Step Closer to Resistance

Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
10-21-2002                  High    Low     Volume Advance/Decl
DJIA     8538.24 +  215.84 8547.83 8230.50   1701 mln  1401/279
NASDAQ   1309.67 +  21.81  1312.53 1267.76   1564 mln  1150/391
S&P 100   456.24 +   7.22  456.91  443.22    totals    2551/670
S&P 500   899.72 +  15.33  900.69  873.06
RUS 2000  368.63 +   5.26  368.63  360.59
DJ TRANS 2338.53 +  59.44 2339.50  2263.47
VIX        38.91 -   0.91   41.27   38.47
VIXN       52.34 -   2.99   57.60   50.71
Put/Call Ratio 0.73
*******************************************************************

Running On Empty

We saw a host of technical barriers fall today, and this bear is 
back in hibernation for the time being. We saw the Dow, S&P 500, 
Nasdaq Composite and OEX all break through support levels from 
the head and shoulders patterns they had formed on the way down 
from the end of August to beginning of October. They also broke 
through two Fibonacci retracement levels, of both recent rallies 
and declines.  They now look poised to test the shoulder tops of 
those previous H&S formations, which should provide the next 
level of resistance.  The Dow finished the day up 215.84, to 
close at 8538.24. The Nasdaq Composite was up 21.81 to close at 
1309.67.  So, why am I not more bullish at this point?  We 
cleared out resistance and rallied just far enough to find more. 
We may still have a couple hundred Dow points to the upside, but 
we are now heading into the next ceiling.  Whether it is made of 
glass, or concrete, is the big question. I am not going to stand 
in its way, but I haven't bought too many out of the money calls, 
either.  Another level to note is 900 in the S&P 500.  It was the 
S&P hitting its July low that seem to trigger the recent rally 
and if it cannot breakthrough 900 (the high today was 900.69), 
the rally could be ending before we even get to the levels 
highlighted below. 

Chart of the Dow



Chart of the SPX



Chart of the OEX



Chart of the COMPX



Last week, we saw a run up to the above mentioned resistance 
levels.  After reaching those levels, the broad market indices 
fell back slightly, regained their legs and then uncoiled to the 
upside this morning.  This looks bullish for the short term, at 
least until we hit those shoulder tops, outlined above.  What I 
am still having a hard time with, is the fact that the economic 
numbers are anything but outstanding.  Even those companies that 
are reporting earnings in line with expectations, or beating 
them, are giving cautious statements.  Here is a sample of some 
of the statements we've heard a third of the way into the fourth 
quarter.

From 3M, which met expectations and placed yearly earnings near 
the high end of previous expectations: "Looking ahead, there are 
no clear signs of improving global economic conditions."

From Microsoft CEO Steve Ballmer, which beat expectations last 
week and surged on higher than expected revenue: "We're not 
trying to say that we think the sales results of our first 
quarter will be sustainable, it is kind of a one time anomaly.  
We're still seeing business as being reasonably tough, at least 
compared to let's say the good old days, reasonably tough around 
the globe."

From EMC: CFO Bill Tueber said that there was "no indication that 
IT spending will recover in the short-term. In fact, I believe 
the IT spending environment eroded further at the tail end of 
(the third quarter) and that any optimism companies had about 
things getting better had dissipated by the end of the quarter."

From Sun Microsystems: CFO Steve McGowan said, "Given the 
uncertain economy, giving a relevant revenue forecast is 
difficult. We look to be profitable in the second half of fiscal 
year 2003."  CEO Scott McNealy said "I am out of the forecasting 
game," and that trying to evaluate revenue outlooks for SUNW was 
"wasted energy."  Sun just reduced its capex for 2003 by 75%.

Regarding automakers:  The head of the Center for Automotive 
Research in Ann Arbor, Michigan said," Over the last 30 or 40 
years, this is probably the most difficult time that they've had. 
It's very challenging.  What I think is most interesting is the 
speed with which things came apart on them ... It's just not 
something that you expect to see happen that quickly."  This 
statement came in spite of GM beating earnings expectations by 
$0.21.

We also have to keep the rally in perspective, much like the 
previous drop.  A common sense look at the almost 2000-point drop 
between August and October, leading up to the recent bounce, just 
"looked" oversold and due for a reversal, or at least an 
temporary one.  By the same token, the current rally looks 
awfully extended and seems due for a correction some time soon. 

A look at the bullish percentages now shows the market bounce 
looking awfully extended.  The Dow has rebounded from a low of 
8%, to a current reading of 50%.  The bearish resistance line for 
the Dow is just above, at 58%.   The SPX has rebounded from a low 
of 20%, to a current reading of 42%.  The NDX has bounced from 
14% to 46%.  While the extreme recent volatility has certainly 
caused big swings in these numbers, which represent the number of 
stocks in an index currently giving point and figure buy signals, 
the risk seems to have shifted from being short at oversold 
level, to being long after an exhaustive rally.

The Index of Leading Economic Indicators came out this morning, 
showing the fourth straight monthly decline. Five of the ten 
indicators fell, including stock prices, average weekly initial 
claims for unemployment insurance, interest rate spread, 
manufacturers' new orders for nondefense capital goods, and index 
of consumer expectations.  The Coincident Index was flat, but 
continues to show a weak economic recovery.

Why am I raining on the parade? The resistance levels were 
significant and only a market with a decent number of buyers 
could blow through these levels.  It appears that we are seeing a 
massive asset allocation from bonds into stocks. The bond market 
is seeing selling over the last week, while the Dow and other 
indices are rallying.  This may be due to pension funds and 
institutional investors getting back into stocks, as they reached 
their July lows and the valuations became more attractive.  
However, a look at the bond market shows the sell-off approaching 
support levels, so we should keep an eye on these points as an 
indication of when the allocation may pause, at the very least.

Chart of the 5-year Treasury



Chart of the 10-year Treasury



One sector to watch is the semiconductors. A look at the 
Semiconductor Sector Index (SOX.X), which is usually a good 
indication of tech demand, shows an impressive run.  The index 
has broken out of its descending channel and broken its 50-dma.  
While there is no doubt that there has been a trend line break, 
one of the more interesting developments has been the group's 
behavior in regard to its 50-dma. Back in August, this sector 
couldn't hold its breakthrough of that barrier, even though the 
Dow, S&P and Nasdaq all experienced continued runs after they 
broke out.  I saw that as a sign that all was not well back then 
and I may not get that same signal this time.  That does not mean 
that I think everything is fine, just that the charts may not 
bear me out.  Back in August, the SOX did break the 50-dma at 
that time, but was unable to hold it. It broke through once again 
today, and I think this sector will be a good indicator as to 
whether the rally will hold. If it does not, it could be the 
anchor that weighs down the rally, in addition to the action in 
the bond market. After the bell, Texas Instruments (TXN) said 
they expect sales to slide 10% in the current quarter.  This was 
far worse than expectations of a 1% drop and the stock, which 
closed at $17.12, was trading $14.02 after hours. I would expect 
the 50-dma to fail on the TXN warning and we'll look to see just 
how bad the failure is before predicting its effect on the 
broader markets. 

Chart of the SOX



Another issue that keeps showing its head is the pension plan 
problem.  GM has gotten plenty of publicity for its pension plan 
being underfunded by as much as $20 billion this year alone.  
However, a report in this weekend's Barron's suggested that 
almost half of the pension plans for the S&P 500 are underfunded, 
which seems to be a waiting time bomb, as companies are required 
to find cash to fund the programs.  Morgan Stanley estimated that 
there was a $300 billion shortfall in 2002, which is money these 
companies will have to come up with over the next few years and 
will come from corporate cash flow.  Many pension plans were 
heavily invested in the stock market and relied on continuing 
business as well.  In the current environment, this number could 
grow, turning into a rolling snowball.

I have avoided the Martha Stewart ongoing soap opera for some 
time now, as the file-in-the-cake recipe jokes have gotten a 
little old. However, it appears that the home economics queen is 
looking at some deeper trouble.  The SEC is apparently getting 
ready to file a civil securities lawsuit against Stewart, which 
may prevent her from serving as director of a publicly traded 
company, such as Martha Stewart Living Omnimedia (MSO).  On the 
positive side, if the SEC is concentrating its efforts on a civil 
suit, it would indicate they aren't seeking a criminal complaint 
involving jail time. 

United Airlines (UAL) announced another 1,250 job cuts today, as 
it struggles to avoid bankruptcy.  Airlines are currently seeing 
a wave of selling in airline debt securities, as well, making it 
that much more difficult for them to raise the cash they need.  
UAL has already warned that they may seek bankruptcy if it cannot 
get federal loan guarantees and wage concessions. J.P. Morgan 
increased its loss estimate for Northwest Airlines (NWAC) and 
narrowed its loss estimate for Continental (CAL).  JPM's analyst 
said that the airline industry lost $1.6 billion in the third 
quarter and that revenue trends have not shown much improvement.  

We have seen a convincing rally in the broader markets.  However, 
be careful of long positions here and keep your stops very close, 
as I am getting the feeling that we may be running out of steam 
soon. I say keep your stops close, because there is no reason to 
limit upside profits while the momentum is still heading that 
way.  Just make sure not to fight a sinking tide if it does turn.  
Enjoy the euphoria, but keep a few puts in your pocket just in 
case.


************
FUTURES WRAP
************

See No Evil?  How Long Can the Market Close Its Eyes?

by Alan Hewko
futures@OptionInvestor.com

________________________________________________________________

Quotes:
4:00 PM Cash Market Close     ES 899.50, YM 8520, NQ 981
4:15 PM Future's Market Close ES 898.50, YM 8210, NQ 980
5:00 PM YM Dow Futures close: 8481
7:00 PM ES 895s, NQ 965

Dow   8638 + 215
SP500  899 +  15
COMPX 1309 +  21

As previously done, I shall use these abbreviations for this 
article, and the same "ES, YM, NQ" is often used in the intra-day 
Market Monitor commentary:
                                       Ticker
ES = E-mini SP500 December futures      ES02Z
YM = E-mini Dow $5 December futures     YM02Z
NQ = E-mini NDX 100 December futures    NQ02Z

________________________________________________________________

The largest after hours news was the TXN warning.

On a day that had the following developments:

1.  MSFT CEO Steve Ballmer told an Australian TV program that 
Sept. qtr sales may not be sustainable. "We're not trying to say 
that we think the sales results of our first quarter will be 
sustainable, it is kind of a one time anomaly," said Ballmer. 
"We're still seeing business as being reasonably tough, at least 
compared to let's say the good old days, reasonably tough around 
the globe."

2.  Weekend rumors that JPM was in so much trouble that other 
large banks such as ONE and BAC were rumored to be in discussions 
to buy JPM.

3.  3M (MMM), a key Dow stock given its weight in the Dow, 
reported in-line earnings, and added they remain cautious on 
business conditions in Q4 (Dec) and 2003 citing higher 
advertising costs, the impact of the West Coast dock strike, 
traditional Q4 seasonality, and a challenging economic outlook. 
MMM cuts Q4 CapEx spending by $100 mln to $900 mln, sees 
sequential weakness in its telecom business, and expects volumes 
to be up 1% YTD... announced Q3 debt levels rose $295 mln over Q2 
levels.

4.  Ford (F) sees softer US sales in October; adding to the 
existing concerns that the retail sector is seeing weaker 
consumer spending.

RECAP OF TODAY
--------------

However, as written this weekend, the market remains in an 
"Ignore bad news" mindset and by 10 AM after a 10 point ES gap-
down from Friday's close, Buyers showed up saying "Hello Mr. Dip" 
[a very bad pun on an movie called 'Hello Mr. Chips'] and the 
rest of the day had every dip being bought until some very key 
resistance levels were taken out today to the upside which were:

Dow over 8500 (day high 8550)
COMPX over 1300
ES (SPX) briefly over 900 to 902
NQ over 972 to touch 985

In the Sunday overnight futures action saw a 10 pt retracement, 
and that selling tone continued from Monday's 9:30 AM open to 
approx. 10 AM.

This was the 2nd day in a row that the morning dip was bought 
near 10 AM.

At 10 AM, ES found support at the 872-875 support area, and on no 
news quite simply spent the rest of the day going higher.... 
and higher.... 
and higher still more ....

Here's a chart of 
ES (Emini SP500 futures) Monday 9:30 AM to 4:15 PM Close




Once the ES 872-875 held, ES took out all the resistance levels 
to the upside (877, 879.50, 883-884 [which was Friday's close], 
spent 2-3 hours chopping between the 893-897 level before 
bursting through the century mark at 900 to touch 902.

The next higher levels of resistance are: 902-905, 908 (minor), 
912, 918 with the underlying supports as marked in above chart.

There really was no sudden or expected news or event which drove 
this rally - as my title suggests, it acted quite to the contrary. 
The market had plenty of bad news it could focus on to use as a 
catalyst for the profit taking everyone expects.  

Below is a Chart of:
Dow Industrials (Dow 30) for Monday 9:30 AM to 4 PM



The Dow number of 8500 has been a "magnet" for so long now, it 
finally broke out of the 8350 level, leaked higher all day long 
to finally get above 8500. Shorts pressed after the first Dow 
8500 print occurred but by 3 PM, when they were only able to take 
it 30 to 40 pts lower, more short covering/buying came in and 
formed the Dow close above 8500 at 4 PM.

Here is a chart of:
NQ (NDX futures) from Friday 3 PM through Monday 6 PM
including the Sunday overnight futures action





On Monday, NQ / NDX seemed to be the "least" strong index for 
while it did indeed break out over the 972 strong resistance 
level, the 990 assault failed, and there was not a second attempt 
near the close.


MONDAY AFTER-HOURS EARNINGS WARNINGS
------------------------------------

The largest piece of news after hours was the rather nasty 
warning from Texas Instruments (TXN), which opened 12% lower 
after it re-opened; along with weakness in all the key Semi 
stocks.

Once futures re-opened at 4:45 PM (after the TXN warning), 
ES (which closed at 898), saw lows of 893s but is upticking off 
those lows to the 8 PM level of 896s.

NQ (which closed at 980) at 4:15 PM, once they re-opened at 4:45 
PM, saw lows of 960 and also has upticked off them to their 
current price of 968 at 8PM.

YM, Dow futures will not re-open for another hour



THOUGHTS FOR TUESDAY
--------------------

While TXN is an important semi stock - is TXN enough reason by 
itself to stop this most impressive market rally? 
In my view - No.

Are the very large chart resistance numbers of 
SPX 900 and Dow 8500 enough to provide a pause for 
some healthy Long Profit taking ?

We shall have to wait and see what Tuesday brings.

One thought might be a failed double top:

That is - if tomorrow morning there is upticking sending SPX back 
over 900 and Dow back over 8500 - making a double top - and from 
those levels, then Long Profit taking could occur.

On the bullish camp - technically, from a Chart perspective, Dow 
8700 cannot be ruled out.

For Tuesday, I would expect the Dow to open above 8450 and below 
8500; and would use those 2 levels for a sense of market 
direction.

Until proven otherwise, this market remains in 
"Buy any and all dips - along with 'ignore all bad news' "

_________________________________________________________________


NEWS REGARDING SINGLE STOCK FUTURES (SSFs)

Their launch has been delayed from this Friday until Nov 8th 
2002.

For more details, here is a link:

http://www.onechicago.com/060000_press_news/press_news_2002/10212002.html


Alan Hewko

futures@OptionInvestor.com


P.S.  Late news out on Wal-Mart (NYSE:WMT).  The company says it 
will be closing some stores in Germany.  I guess the Germans 
apparently don't like our friendly American service. 


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


Delayed response had Dow bull's saying, "MMM...MMM...Good!"

For the seventh consecutive session, the Dow Industrials, S&P 500 
and S&P 100 refused to break their previous session's low.  
Despite weakness for index heavyweight, the NASDAQ-100 Index 
reversed higher to finish the session with a 2.42% gain, and came 
close to matching the Dow's 2.59% gain.

Like a caboose, the smaller-cap Russell-2000 Index (RUT.X) 368.63 
+1.44% brought up the rear, after showing some good relative 
strength early in the session, when the larger-caps were showing 
some weakness.

This short-term observation made from this morning may be an 
important observation in coming sessions.  If the larger-caps do 
show some weakness, but smaller caps show relative strength, if 
not post gains, then an observation of "profit taking" in the big 
caps may give bulls some courage to buy a pullback.  

Dow Industrials Chart - Daily Interval


 

Dow component 3M (NYSE:MMM) $129.00 +2.94% reversed an early-
morning decline of $-2.07 to finish in positive territory after 
meeting the Street's estimates before the opening bell.  Once the 
Dow broke above Friday's high and downward trend, the Dow surged 
to 8,500, which now has the 8,700 level in play.  

While not a Dow component, Intel's (INTC) $15.45 +6.84% "little 
brother" Texas Instruments (NYSE:TXN) $17.12 +0.11% reported 
earnings of $0.09 per share, which missed estimates by a penny, 
but guided lower for next quarter.  That sent shares of TXN 
plummeting -17.9% to $14.06 in after-hours trading, while Dow 
component Intel (INTC) fell -3.3% to $14.93 over Instinet.  On 
10/15/02, it was INTC's after-the bell earnings, which saw the 
Dow give back 213 points the next day.

Tonight's Dow Industrials Bullish % ($BPINDU) reading is 50%, 
showing a net gain of 2 Dow components to point and figure buy 
signals (MMM, DIS).

Tomorrow, Dow components Procter & Gamble (NYSE:PG) $92.19 +0.47% 
reports earnings before the opening bell.  Consensus is for the 
consumer products giant to earn $1.10 a share versus year-ago 
$0.96.  

S&P 500 Index Chart - Daily Interval


 

While not shown on the above chart, the SPX broke above a 
downward trend from the May 17th relative highs of 1,106, while 
another downward trend would come into play at approximately SPX 
925 if taken from the March 19th highs of 1,173.  While there's 
nothing that says the SPX can't jump out of our "cloned" 
regression we put in place this weekend, the upper-end of the 
channel may keep some bulls on the sidelines.  The series of 
higher lows on a daily basis, just like the Dow, hints that bears 
are still rather aggressive with short-covering on weakness.  
With S&P futures (sp02z) trading down at 894.50, current 
assessment is that SPX bears in the futures markets aren't overly 
eager to sell TXN's "bad news."

Today's action saw further internal strengthening in the S&P 500 
Bullish % ($BPSPX) with a net gain of 28 stock giving point and 
figure buy signals, with the bullish % rising to 43.2%.  Again, a 
relative high reading here was 58% in late August, so there's 
still some internal bullishness that can be had.  From there, 
further bullishness could be found at March's high reading of 
76%.

S&P 100 Index Chart - Daily Interval


 

I can't argue with bears that things may have gotten a little 
carried away on the upside move, but it has taken just 8 sessions 
to reverse a 20-session decline.  However, right now, a bear 
shouldn't be too eager to step in front of the locomotive.  
Heaven forbid the markets get some type of "good" economic data.  
The 464 level was a key "reversal" level and may tie in with the 
upper-end of "cloned" regression on the OEX chart.

The S&P 100 Index (OEX.X) saw a net gain of 5 stocks to point and 
figure buy signals today as the OEX Bullish % ($BPOEX) from 
www.stockcharts.com grows to 47%.  

NASDAQ-100 Index Tracking Stock (AMEX:QQQ) - Daily Interval


 

The Q's closed above our 80.9% retracement, but it was probably 
too much for a bull to ask Texas Instruments (NYSE:TXN) $17.12 to 
buck Intel's trend from a couple of days ago.  Good news for QQQ 
bulls is that TXN is NOT a QQQ component, but as mentioned in 
recent weeks, tech-bulls have to plan on some land mines now and 
again.  

The NASDAQ-100 Index (NDX.X) 979.35 +2.42% traded as low as 
961.00 after the TXN earnings, but have edged up from there at 
965 as I write (09:24 PM EST).  

According to stockcharts.com, the NASDAQ-100 Bullish % ($BPNDX) 
saw a net gain of 4 stocks to buy signals today and has the 
bullish % rising to 46%.  Late-Augusts 60% level was the relative 
top before the decline into early October of 14%.

Microsoft (NASDAQ:MSFT) $52.51 -1.2% traded heavy all session and 
edged lower to $52.00 in after-hours trading.

Jeff Bailey


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

Stocks/Stock Funds Surge


U.S. stocks and stock funds closed the week significantly higher 
buoyed by upbeat earnings reports from Citigroup, General Motors 
and IBM.  

The Vanguard 500 Index Fund, which mirrors the S&P 500 large-cap 
index, surged 5.9% last week, with both value and growth indices 
participating in the rally.  Vanguard Extended Market Index Fund, 
which tracks the Wilshire 4500 index of small/midcap stocks, was 
5.1% higher for the week ended Friday, October 18.  According to 
Lipper, the average large-cap core fund gained 5.7% for the week, 
on par with the market (S&P 500 index).




International equity indices were also higher, with the Vanguard 
Developed Markets Index Fund (MSCI EAFE Index) posting a 4% gain 
in dollar-equivalent terms.  European stocks rose by 4.5%, doing 
better than Pacific stocks, which rose 2.9% for the 5-day period.  
Vanguard Emerging Markets Index Fund notched a nifty 7.4% weekly 
return.     

With investors celebrating the week's stock market gains, bonds 
and bond funds finished the week significantly lower.  Vanguard 
Total Bond Market Index Fund, which mirrors the Lehman Aggregate 
Bond index, finished the week with a 1% loss, with weekly losses 
increasing as you went out in bond maturity.  Vanguard Long-Term 
Bond Index Fund lost 2.7%, while Vanguard Intermediate-Term Bond 
Index Fund was 1.6% lower for the week.

All in all, a great week for equity investors and a bad week for 
fixed income investors, with the exception of taxable high yield 
bond funds, which rose 0.5% on average for the week according to 
Lipper.        

Lipper Equity Fund Indices

Lipper equity fund indices reflect the positive environment for 
stocks last week, with only gold funds producing losses overall.  
Below are the 5-day and YTD indices as of October 18, 2002, per 
Lipper.  

 Top Five Equity Fund Indices:
 +6.1% Science & Technology Funds (YTD -44.3%)
 +6.0% Multi-Cap Growth Funds (YTD -29.0%)
 +5.9% Emerging Markets Funds (YTD -10.0%)
 +5.8% Large-Cap Growth Funds (YTD -25.3%)
 +5.7% Large-Cap Core Funds (YTD -20.1%)
  
 Bottom Five Equity Fund Indices:
 -3.0% Gold Funds (YTD +28.3%)
 +3.1% Balanced Funds (YTD -12.4%)
 +4.4% International Funds (YTD -15.6%)
 +4.7% Mid-Cap Value Funds (YTD -18.2%)
 +5.1% Multi-Cap Value Funds (YTD -20.7%)
  
You can see that growth-oriented funds performed a little better 
overall than value-driven funds with tech stocks doing well, but 
both equity styles produced strong 5-day gains.  Large-cap funds 
and multi-cap funds dominated the top five list.  Gold funds saw 
weekly losses again, cutting their average YTD gain to 28% (once 
over 50%).

Lipper Fixed Income Fund Indices

Taxable high yield bond funds were the exception last week in the 
fixed income marketplace, rising in value compared to declines by 
all other Lipper fixed income fund indices.  Municipal high yield 
funds, meanwhile, lost 1.8% on average for the week. 

 Top Five Fixed Income Fund Indices:
 +0.5% High Current Yield Funds (YTD -10.0%)
 -0.4% Short Investment-Grade Funds (YTD +2.4%)
 -0.5% GNMA Funds (YTD +6.5%)
 -0.6% Short Municipal Funds (YTD +2.5%)
 -0.9% Global Income Funds (YTD +5.3%)
 
 Bottom Five Fixed Income Fund Indices:
 -2.5% General Muni Debt Funds (YTD +5.6%)
 -1.8% High Yield Municipal Funds (YTD +3.4%)
 -1.3% International Income Funds (YTD +9.7%)
 -1.2% U.S. Government Funds (YTD +7.3%)
 -1.2% Corporate A-Rated Debt Funds (YTD +4.4%)

You can see the range of losses last week among investment grade 
bond funds, with losses increasing as you extended out the yield 
curve.  For example, Vanguard Short-Term Corporate Bond Fund had 
a negative 0.6% return for the week, while sibling Vanguard Long-
Term Corporate Bond Fund declined 2.6% in value.    

Largest Mutual Funds

America's largest actively managed stock fund, Fidelity Magellan, 
delivered a 6.6% weekly return for investors to lead the way last 
week.  The upbeat earnings report by Citigroup, one of Magellan's 
largest holdings, contributed to the fund's nice gains last week.    
 
 Largest Stock Funds:
 +5.9% Vanguard 500 Index (VFINX) YTD -22.0%
 +6.6% Fidelity Magellan (FMAGX) YTD -21.2% 
 +4.4% Investment Company of America (AIVSX) YTD -16.8%
 +5.1% Washington Mutual Investors (AWSHX) YTD -16.9%
 +5.6% Growth Fund of America (AGTHX) YTD -22.4%
 +3.8% Fidelity Contrafund (FCNTX) YTD -6.6%
 +5.2% Fidelity Growth & Income (FGRIX) YTD -15.6%
 +5.2% EuroPacific Growth (AEPGX) YTD -15.7%
 +5.6% New Perspective (ANWPX) YTD -18.8%
 +3.7% Vanguard Windsor II (VWNFX) YTD -19.3%
 
 Largest Bond Funds:
 -0.8% PIMCo Total Return (PTTRX) YTD +5.9%
 -0.8% Vanguard GNMA (VFIIX) YTD +7.3%
 -1.0% Vanguard Total Bond Market (VBMFX) YTD +4.7%
 -0.6% Bond Fund of America (ABNDX) YTD -1.1%
 -0.6% Vanguard Short-Term Corporate (VFSTX) YTD +2.2%
  
 Largest Balanced Funds:
 +2.7% Vanguard Wellington (VWELX) YTD -10.0%
 +2.2% Income Fund of America (AMECX) YTD -9.6%
 +3.3% Fidelity Puritan (FPURX) YTD -10.7%
 +3.0% American Balanced (ABALX) YTD -10.9%
 +3.4% Fidelity Asset Manager (FASMX) YTD -10.6%

With blue-chip growth stocks doing well, funds like T. Rowe Price 
Blue Chip Growth Fund, up 7.4%, were among the top performers for 
the weekly period.  Stock funds that had been hedging their bets, 
such as Fidelity Contrafund (+3.8% for the week), lagged a little 
compared to other stock funds in last week's equity market surge.  
Some aggressive growth funds, like Smith Barney Aggressive Growth 
Fund, were up over 7% for the week.

Balanced funds produced 5-day gains of around 3%, with some funds 
doing even better.  Vanguard Asset Allocation Fund, which employs 
a tactical asset allocation (TAA) model to determine the relative 
attractiveness of stocks, bonds and cash, returned 5.6% last week 
to lead the group.  Balanced funds that have large bond stakes of 
around 60% (versus the traditional 40% bond weighting) were among 
the week's balanced fund laggards - names like Vanguard Wellesley 
Income and Franklin Income. 

Money Market Funds

iMoneyNet's all-taxable money market fund average stood at 1.21% 
as of October 15, 2002, down a basis point (0.01%) for the week.  
The highest retail money fund yields remain PayPal MMF at 1.79% 
and Touchstone MMF at 1.75%.  INVESCO Treasurers MMF and Scudder 
YieldWise MMF are tied for the third highest current 7-day yield 
at 1.57%. 

Fidelity Cash Reserves Fund and Vanguard Prime Money Market Fund, 
two of the largest and best-run money market funds, have current 
7-day simple yields of 1.51% and 1.48%, respectively.  The 7-day 
yields of these MMF bellwethers are typically above the iMoneyNet 
all-taxable average due to their lower relative expense.

Mutual Fund News

Brill.com is reporting that Sheldon Jacobs' newsletter (No-Load 
Fund Investor) is telling fund investors that they won't need to 
worry as much this year as in past years about capital gains and 
taxes because of the market slump.  The newsletter says that even 
those funds that do have distributions this year will most likely 
be paying out less than they have in the past.

Brill's Mutual Fund Interactive (www.brill.com) is suggesting to 
readers that they consider steadier investments today, such as a 
large-cap fund that emphasizes dividend income, saying it's good 
to get some income as well as growth from your investment.  They 
say that large caps with good earnings outlooks often are beaten 
down in price.  Thus, you can get some dividend income with some 
capital appreciation potential to boot.  Be careful, however, as 
some "equity income" funds emphasize growth more than income and 
are less true to their names.

We have said for a while now that experience matters, especially 
in a down market, and many of our reports this year have favored 
funds with long manager tenures.  Apparently Morningstar concurs, 
reporting this week the results of its analysis of "long-tenured" 
funds.  They say that funds with managers or management teams in 
place for 20 years have preserved capital better than funds with 
less experienced funds management.  This small group of 60 funds 
lost 10% on an annualized basis between the total stock market's 
peak (March 24, 2000) and October 16, 2002.  For the same period, 
the average domestic stock fund lost about 16% a year.  Further, 
funds with less experienced managers or management teams (versus 
the 4-year average manager tenure) lost about 17.5% a year on an 
annual-equivalent basis.

Janus Funds is launching four new funds geared to "institutional" 
investors that will be subadvised by subsidiaries and subadvisors 
of its former sister company Berger Funds, Morningstar reports in 
its weekly report of fund openings, closings and manager changes.  
The article also states that Berger's struggling growth funds are 
candidates for merger with comparable Janus growth funds (they've 
had their share of struggles also), so be on the lookout for that 
consolidation move.  

That is it for this week's Weekly Fund Wrap.  Have a great week.  

Steve Wagner
Editor, Mutual Investor 
steve@mutualinvestor.com
 

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

DOW Theory Confirmation?
by Mark Phillips
mphillips@OptionInvestor.com

Created and refined by its inventor, Charles Dow, DOW Theory
attempts to divine the future of the broad market by focusing on
Value.  Price action is important, as are other indications such
as moving averages, volume, confirmations and divergences.  Much
talk emerged during the great boom of the late 1990s that perhaps
DOW Theory was a form of market analysis that had outlived its
usefulness.  Perhaps, perhaps not.  I remember a lot of
discussion from the same timeframe that Warren Buffet had become
irrelevant as well, due to his abject refusal to invest in
anything he didn't understand - namely technology.  Well, the
past 2 1/2 years have proved once again that the Oracle of Omaha
knows what he's doing, as he continues his decades-long pursuit
of compelling values.

I'll be the first to tell you that I am a novice when it comes
to understanding the nuances of DOW Theory, but there are some
important tenets of the theory that I have learned and feel are
quite important to determining where we are and where we might
be heading.

First though, let's cover just a bit of history.  Charles Dow
began publishing a little paper called the Wall Street Journal
back in 1889.  Perhaps you've heard of it?  GRIN  From 1899-1902,
Mr. Dow wrote a series of articles for the WSJ, which later
were published in a book entitled "The ABC of Stock
Speculation".  Since then, the great "DOW Theorists" like
William P. Hamilton, Robert Rhea and George Schaefer have
provided their own interpretations and enhancements to the DOW
Theory.  But when it is all said and done, it comes down to
values.

One quote from Mr. Schaefer that I particularly like is, "It is
always safer to assume that values determine prices in the long
run.  Values have nothing to do with current fluctuations.  A
worthless stock can go up 5 points just as easily as the best,
but as a result of continuous fluctuations, the good stock will
gradually work up to its investment value."  Or put more simply,
in the long run, value is paramount.  It sure seems like that is
an accurate portrayal of what has come to pass in the stock
market in the past couple years.

From what I have been able to learn over the past couple years,
each of the great DOW Theorists have added their own flavor and
interpretations to this method of market analysis, but the basic
tenets that Charles Dow put forward a century ago are still at
the core of DOW Theory.  To my knowledge, Richard Russell is
the current reigning authority on DOW Theory and he publishes a
daily newsletter where he talks about the daily market action and
how it relates to DOW Theory.  For those that are interested in
learning more than I could ever pass on to you, Mr. Russell has
written a number of interesting articles on his site, 
http://www.dowtheoryletters.com. 

Recall that DOW Theory is based on Value.  On that measure alone,
we would be hard pressed to say that we are anywhere near a major
bear market bottom.  The S&P Composite is currently selling at
just over 33 times earnings, with a dividend yield of a paltry
1.79%.  At bear market bottoms, PE ratios should be close to half
their current reading, while dividend yields should be at least
triple their current level.  That sort of metric only adds
credence to the idea that this is just another bear market rally.

I recall reading an article by Mr. Russell back in late 1999,
where he called a beginning to the bear market that we've clearly
been in since the end of the first quarter of 2000.  He was
talking about the issue of confirmation, where (I believe) the
NYSE Composite failed to set a new high, while the DOW went on
to new highs.  This was an important divergence in DOW Theory.
With the DOW, NASDAQ and S&Ps still screaming to new all-time
highs, not a lot of attention was paid to his statement that we
were now in a bear market.  Just another old-school fuddy-duddy.

Well, maybe not!  Since that point in time there have been
numerous confirmations and non-confirmations, between the Dow
Industrials, Dow Transports and Dow Utilities. DOW Theory says
that for confirmation of a bull (or bear market) a new high (or
low) in one of these indices must be confirmed by a corresponding
high (or low) in the other indices.  A failure to achieve that
confirmation is regarded as a divergence.

Most recently, I've been watching the action between the Dow
Industrials (INDU) and Dow Transports (TRAN).  Back on October
9th, the INDU dropped to a fresh bear market low of 7286 (close),
which was accompanied by the TRAN setting a fresh bear market
low of 2013.  Even better, the Dow Utilities (DJU) also fell to
a fresh bear market low of 167.  That's a solid double
confirmation.  So why did the markets then do an about face and
post an impressive rally over the past 2 weeks?  Here's a
clue -- it's a bear market rally.

Something we have to keep in mind is that DOW Theory is NOT a
trading tool.  It is an analysis method that helps us to determine
the long-term nature of the market.  DOW Theory is currently
telling us that the long-term trend for the market is down, as it
is currently in the clutches of a mighty and angry bear.  But that
doesn't mean he can't take occasional breaks to digest what he's
just eaten.

In fact, I've noticed that major confirmations between the TRAN,
INDU and DJU frequently lead to important reversals in the broad
market.  In other words, the confirmation often becomes a
powerful contrarian indicator over the near-term.  Does that mean
DOW Theory is useless?  Not by a long shot!  But I think that
most of the time, when that major confirmation presents itself, 
most (if not all) of the move in that direction has already
happened, at least for that leg of the cycle.  That was certainly
the case in September of 2001.

The panic following the terrorist incidents pushed both the INDU
and the TRAN to new lows.  That confirmation was good for a
solid 6-month rally in both indices, with the INDU gaining more
than 30% and the TRAN advancing by nearly 50%.  But what has
happened since then?  Earlier this month, both indices fell to
new bear market lows, on the same day.  Is it a coincidence that
the Dow Industrials are up more than 1300 points since the
intraday low below 7200 on October 10th?  I don't think so.
Using the rally off last year's September lows as a guide, I
would say that the rally we are currently experiencing likely
has a fair amount of room to run.  And that dovetails nicely with
other more familiar indicators such as the PnF Bullish Percent
readings and the oscillators on weekly charts of the major
indices.

I believe the important information currently being conveyed by
DOW Theory is that we are still deep in a powerful bear market.
This rally will run its course just like every other one for the
past 2 1/2 years and then we will be faced with another vicious
decline.  Trade this rally for all it's worth, but don't fall
for the illusion that this is the end of the bear.  And I think
that is the important utility of DOW Theory.  It helps us to
retain perspective on the longer-term direction of the market
while doing what we do best - trading the shorter-term trend as
long as it lasts.

I hope that helps!

Mark


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

One Giant Step Closer to Resistance

The markets stumbled at the open but the dip buyers rushed back 
into the void and powered the Dow to another post bottom high. 
Despite numerous rumors and mediocre earnings the indexes soared 
back to the near the highs of the longer term down trend.  

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The Option Investor Newsletter                   Monday 10-28-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: None
Dropped Calls: None
Dropped Puts: IBM
Play of the Day: Call - AZO

Updated on the site tonight:
Market Watch
Market Posture

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

None


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

None


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

IBM $76.56 +2.00 (+2.00) Positive comments about a mild rebound
in hardware demand from Michael Dell at a Tokyo news conference
put a bid under the hardware stocks on Monday, along with news
that IBM would be offering more attractive financing to certain
customers.  Despite weakness in the broad market, shares of IBM
traded strong all day, hitting an intraday high of $77.50.
Although the stock backed off a bit in the afternoon session,
there wasn't enough pressure to get Big Blue back under our $76
stop at the close.  Our discipline mandates closing the play out
tonight, but we still like the stock short in the still-gloomy
fundamental environment.  We'll just have to look for a failure
at a higher price before playing it again.


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


AZO – AutoZone, Inc. $83.11 -2.84 (-2.84 this week)

Company Summary:
AutoZone is a retailer of automotive parts and accessories,
primarily focusing on do-it-yourself customers.  Each of its
more than 2900 stores in 42 states and Mexico carries an
extensive product line for cars, vans and light trucks,
including new and re-manufactured automotive hard parts,
maintenance items and accessories.  Approximately half of its
domestic stores also have a commercial sales program, which
provides commercial credit and prompt delivery of parts and
other products to local repair garages, dealers and service
stations.

Consistency is a wonderful thing, especially in a volatile
market like we have seen over the past several months.  So when
we find a stock that continues to behave in a predictable manner,
we tend to keep going back to the well.  While the Retail sector
has been a mixed bag over the past year, shares of auto parts
retailer AZO have been a refreshing bullish story.  In reality,
AZO has provided proof that earnings DO matter, as the company
has absolutely annihilated earnings estimates the past 3 quarters.
Most recently, the company bested quarterly estimates of $1.41
with $1.73 on September 25th, clearly surprising even the most
bullish investors, as the stock tacked on better than a $6 gain
that day.  Since then, AZO has continued its 3-month trend of
posting higher highs and higher lows, obediently rebounding every
time it encounters the ascending trendline connecting the lows.
That trendline currently rests at $81.50, which just happens to
be the site of the previous price peak in early October.  As long
as the company continues to deliver on the earnings front,
investors will likely keep rewarding it with a higher stock
price.  Along with the rest of the market, AZO started showing
signs of weakness on Thursday, dropping back near the $84 level
before finding support and rebounding into the close of trading
on Friday.  While that is encouraging, we think we've got a fair
chance at getting an even better entry point next week.  Look for
a dip into the $82-83 area, where the stock found a top in May
and June, also the site of the 20-dma ($82.74) to provide for a
great entry opportunity into the play before the bulls take a
fresh run at new highs.  Take a look at the AZO chart, and you
can see how each push to new highs put in place a near term top,
followed by a mild decline leading to the next solid entry point.
For this reason, we don't want to target entries on breakout
moves.  Rather, a breakout to new highs will be a signal to lock
in gains on existing positions and then wait for the next entry.
Our stop is initially set at $81.50.

Why This is our Play of the Day

With negative bits of news trickling out of the Retail sector
again on Monday, the RLX index traded down by more than 2%, so it
may come as a surprise that we're listing AZO as our Play of the
Day.  But a quick look at the daily chart shows just why we chose
it.  The company's financial performance has been top-notch over
the past year, and being tied to the automotive business, the
company hasn't really been affected by the fluctuations in
consumer spending that have hit some of the more mainstream
Retailers.  More importantly, AZO has been riding an ascending
trendline since late July, where each sharp pullback is met with
buyers at a higher level than the previous pullback.  Put another
way, weakness in the overall Retail sector sets us up for a solid
entry into the AZO play.  Today's selling came to a halt near the
20-dma (currently $82.96), which could make for a solid entry on
the rebound tomorrow.  But what we'd really like to see is a dip
to the ascending trendline (now at $82) and a volume-backed
rebound from there.  Keep stops set at $81.50.

BUY CALL NOV-80 AZO-KP OI=1034 at $5.40 SL=3.50
BUY CALL NOV-85*AZO-KQ OI=1174 at $2.40 SL=1.25
BUY CALL DEC-85 AZO-LQ OI=1332 at $5.00 SL=3.00
BUY CALL DEC-90 AZO-LR OI= 786 at $2.85 SL=1.50

Average Daily Volume = 1.23 mln
http://www.OptionInvestor.com/charts/oct02/index.asp?symbol=AZO102802


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

Rangebound

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/mp_102802.asp


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

Breakdowns Developing

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/wl_102802.asp


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