Option Investor
Newsletter

Daily Newsletter, Monday, 10/28/2002

HAVING TROUBLE PRINTING?
Printer friendly version
The Option Investor Newsletter                   Monday 10-28-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.
 
In Section One:

Wrap: Low Ceiling
Futures Wrap: Broke but not Broken
Index Trader Wrap: Equities take a rest as stock fade toward close
Weekly Fund Wrap:  Make That Three in a Row
Traders Corner: Reversal of Fortune

Updated on the site tonight:
Swing Trader Game Plan: 

Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
10-28-2002                High    Low     Volume Advance/Decl
DJIA     8368.04 - 75.95 8531.45  8325.45 1650 mln  745/888
NASDAQ   1315.83 - 15.30 1346.21  1310.63 1628 mln  658/940
S&P 100   452.09 -  3.56  460.84  449.64   totals  1403/1828
S&P 500   890.23 -  7.42  907.44  886.15
RUS 2000  369.01 -  3.63  374.86  368.52
DJ TRANS 2279.48 - 33.83 2332.54  2270.26
VIX        35.67 -  0.60   36.35  34.20
VIXN       51.52 +  1.13   52.77  50.47
Put/Call Ratio 0.71
*******************************************************************

Low Ceiling
by Steve Price

It appears that the markets have decided to take a breather, with 
most of earnings season behind us.  After the recent rally, we 
have been moving sideways for the last week, and picking a long-
term direction has become more difficult. Today saw red across 
the board, but didn't break any major barriers.  However, those 
investors who do choose a direction have some decent stop loss 
targets that have defined the recent range.   

We have started to approach resistance in several of the sector 
indices. These sectors will help determine whether we break to 
the upside, or drift back where we came from.  It is probably 
time to take a look at some of these sectors from a macro 
standpoint and see just where we stand.  While individual results 
will always affect individual stocks, a look at the sector charts 
should give traders an idea of just what they are up against as 
they consider jumping back into the market.  

One of these sectors is the financials.  The sector headed higher 
today, after American Express (AXP) reported earnings that beat 
the street by a penny and more than doubled from a year ago.   
The banks have been on fire recently and this morning Citigroup 
(C) also received an upgrade from Lehman Brothers. However, after 
a three-week rally, the Kbw Banks Index (BKX.X) has hit a 
consolidation level that seems to have a thick ceiling on it.   
The rallies in both C and AXP were turned back and the stocks 
finished up only $0.60 and $1.12, respectively. Luiz Inácio Lula 
da Silva came out victorious in Brazilian elections.   There has 
been widespread concern that he would not hesitate to default on 
Brazil's international debt.  He has talked down that 
possibility, and apparently investors today didn't seem too 
concerned. However, if that were to happen, then there are a 
number of large U.S. banks that could see heavy losses, including 
Citigroup and J.P. Morgan.  If the banks start rolling downhill 
once again, then any broad market rally will likely be over. 

Chart of the Kbw Banks Index (BKX.X)




Another important sector for the economy is the retail group.  
Wal-Mart came out this morning and announced that its October 
sales were tracking within its projected goal of 2-4% sales 
growth.  The lead lining in that announcement was twofold - the 
2-4% goal reflects lowered guidance from previous months and 
Halloween candy and costume sales were below expectations.  While 
the average trader may not care about M&Ms and Frankenstein 
masks, the implication could be much greater.  If consumers 
aren't reaching into their pockets and increasing purchases at 
times when they traditionally do so, then what can we expect as 
we head into the holiday shopping season.  Halloween may 
represent only a minor holiday, but the message from last week's 
Consumer Sentiment decline is clear.  Consumers are concerned 
about their jobs and the stock market and are simply not in a 
spending mood.   The Retail Index (RLX.X) has also run into 
resistance after the recent rally and appears to be rolling over. 
Tomorrow's Consumer Confidence number could give the group a 
boost if there is a positive surprise, but that seems unlikely.

Chart of the Retail Index




Another group that will have to participate in order for a rally 
to really get going is the cyclicals. The Cyclical Index (CYC.X ) 
includes heavyweights over a broad range of sectors that tend to 
perform closely according to the economy.  Components include 
Alcoa, Citigroup, Ford, Hewlett-Packard, 3M and FedEx.  While the 
Dow and S&P have broken through their 50 day moving averages and 
held those gains, the cyclicals have actually found resistance 
there and begun to roll over.  I generally view the CYC.X 
similarly to the Dow, only more comprehensive.  The weakness here 
has me concerned about the Dow rally.  If the group can breakout 
to the upside through the 50-dma, the broader market rally will 
have more credibility. 

Chart of the Morgan Stanley Cyclical Index (CYC.X)




The housing market has continued to keep consumers positive about 
at least one asset - their homes. Record low rates and record 
setting housing purchase numbers have salvaged home values, while 
investors' 401(k) retirement plans have taken a beating in the 
equity markets.  However, last week's economic data showed that 
while sales in the Northeast were strong, the South and Midwest 
housing sectors were seeing a pullback.  Homes at the higher end 
of the pricing spectrum are also seeing a slowdown and the number 
of homes on the market is at its highest point.  With mortgage 
rates creeping higher, the catalyst for much of the hot housing 
market may be cooling off. The homebuilders are measured by the 
Dow Jones U.S. Home Construction Index (DJUSHB).  This index, in 
following the trend of other sector indices, has also reached a 
level of resistance and looks to be rolling over. This is in 
spite of recent positive earnings news from a number of builders, 
as investors are beginning to wonder what future earnings will 
look like if the housing market cools.

Chart of the Home Construction Index

 

The telecom sector has been showing some strength after a brutal 
couple of years that were filled with bankruptcies and accounting 
scandals. Companies have been cutting staff and capital spending, 
attempting to crawl back out of the red.  The North American 
Telecoms Index (XTC.X) includes companies such as AT&T, Lucent, 
Qwest, Verizon and Nortel.   The group has finally been showing 
some promise, putting together a nice run, along with the rest of 
the market.  However, a look at the chart shows yet another 
sector heading into resistance.  Unlike some of the others, this 
one has not begun a significant rollover, but the rally has 
definitely slowed. 

Chart of the North American Telecoms Index (XTC.X)




The Semiconductor Sector Index (SOX.X), which has been the 
biggest surprise in the last few weeks, continues to make 
headway.  In spite of constant warnings about a lack of IT 
spending and a host of companies lowering fourth quarter 
guidance, the index continues to set higher intraday highs.  
However, we may be looking at yet another sector that has hit its 
ceiling.  After a 38% rally in less than three weeks, the 300 
level looks like a challenge, with additional resistance 10 
points higher.  The sector broke through its 50-dma in impressive  
fashion and has continued higher, but the last couple of rallies 
have found resistance at a familiar level. 

Chart of the SOX




The reason for posting the above charts is to show readers that 
want to pile on a rally that this may not be the best time to do 
so.  While the market "feels" bullish after one gain following 
another; particularly gains that seem to shrug off bad news, we 
really have reached a point where another push will be needed to 
break through.  That push may be coming next week. Or at least 
many investors and traders are beginning to assume it is. The 
Federal Reserve Open Market Committee, which sets the fed funds 
rate, meets on November 6.  The chance of a rate cut, following 
continuing weak economic indicators, is being pegged at 50%.  The 
last rate cut was almost a year ago and the rate has stood at 
1.75% since.  This week will bring a host of economic data, 
including Consumer Confidence on Tuesday and third quarter GDP on 
Thursday, along with Chicago PMI, October unemployment, non-farm 
payrolls and personal income.  The market action we see at the 
end of the week may seem counterintuitive on the surface.  As 
this economic data is released, the markets are likely to rally 
on soft numbers and drop if the numbers are above expectations.  
The reason for this is that there will be a focus on the FOMC 
meeting and negative economic news will increase the likelihood 
of a rate cut (and vice versa). 

We now seem rangebound in the Dow between 8250 and 8550.  The 
sideways movement may continue, however volatility is likely to 
pick up toward the end of the week when the economic data is 
released. The Market Volatility Index (VIX), which hovered near 
40 last week, has now dropped to 35.67, indicating that there is 
less fear of the downside in the marketplace. The longer we are 
stuck in this range, the more significant a breakout is likely to 
be.  The S&P 500 has found its own range, between 880 and 900.  
While it has made several forays over 900, it has been unable to 
hold those gains, making me weary of a continued rally.   The 
trade today of 905 was a triple top point and figure breakout, 
which is usually bullish.  However, one of the concerns with this 
type of pattern is the "bull trap," which is a one-box breakout 
(which this was), is followed by an immediate reversal.  A trade 
of 910 would satisfy the PnF bulls, and I would need to see a 
close over 900, as well. 

Charts of The Dow and SPX


 
The sideways movement can be frustrating for traders looking for 
entry points.  However, sometimes there is nothing you can do but 
wait. We are likely to see a pick up in activity later in the 
week, so those itchy trigger fingers may have to wait until then.  
Keep an eye on the above outlined levels and be ready for a 
breakout in either direction. 


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

Broke but not Broken
by Alan Hewko

futures@OptionInvestor.com

___________________________________________________

Quotes:
4:00 PM Cash Market Close     ES 890, YM 8351, NQ 982
4:15 PM Future's Market Close ES 892, YM 8361, NQ 986
5:00 PM YM Dow Futures close: YM 8376
8:00 PM Futures: ES 890.75, NQ 986

Dow   8368  - 75
SP500  890  -  7
COMPX 1315  - 15

Advance/Decline by Volume was bullish through the morning, peaked
near 1:30 PM and ended the day negative.

Abbreviations used by the Futures Market:
                                       Ticker
ES = E-mini SP500 December futures      ES02Z
YM = E-mini Dow $5 December futures     YM02Z
NQ = E-mini NDX 100 December futures    NQ02Z

______________________________________________________

Monday had something for both Longs and Shorts. Monday found the 
markets Gapping Up at the open and making new Monthly Highs, at 
least for the ES02Z. Longs took profit, and after spending most 
of the day selling off, found 3:30PM buyers. 

Chart wise: New Monthly highs were made today at the open on the 
ES02Z, but once again, Dow could not maintain a level above 8500. 
On a purely technical standpoint, higher highs and higher lows 
were made today.

The morning bullish news was a pre-open comment from DELL 
indicating they were seeing "some rebound" in hardware demand. 
Also, IBM was up strongly on news of offering 0% refinancing. 
Lastly, the Wall Street Journal and Washington Post reported 
their views that the Federal Reserve will cut rates before the 
year is over, and with the Nov. 6th FOMC date looming; this all 
added to the bullish sentiment at the open.




Monday 9:30 AM market open prices:
ES 907s, YM 8532, NQ 1008 * new Monthly highs and Day Highs

Dow 8500-8550 several times last week has proved to be very 
strong resistance to break out to the upside, and that again 
proved to be the case this morning. 

The selling started right at the open as the morning gap up was 
faded (reversed) and it lasted until about 11 AM to 12 AM where 
ES found support at 892 (which also is the area of Friday 
afternoon's buying).

Chart: ES02Z (E-mini SP500 futures) Friday 9:30 AM - 4:15 PM





The above chart is FRIDAY's ES chart and you can see how ES 892 
was support late in the day. That same 892 level became support 
today in the 11:AM to 12:Noon range.




MONDAY'S CHARTS

Chart: ES02Z (E-mini SP500 futures) Monday 9:30 AM - 4:15 PM




From this level at noon onward, the dip buyers returned 
(answering the question of 'are the dip buyers still with us'). 
This buying lasted till about 1:30 PM where ES had pierced the 
psychological level of 900 but failed right under its 905 
resistance.

Near this time, GE came out with some rather bearish news of GE's 
CEO saying that the economy would have to be extraordinarily 
strong in order for GE to post double digit growth in 2003. One 
might view this as a "soft" warning from a key important stock, 
but for 30-45 minutes, this GE news was totally discounted as the 
buying continued in a seemingly reckless fashion. If you were 
just looking at the tape, you would have sworn GE just guided 
their earnings higher, and not lower.

The rally ran out of steam as perhaps this GE news and its 
meaning cursed through trader's minds and the reversal was rather 
hard and quick, having the selling last from 1:30 PM to 3:30 PM.

At 3:30 PM, on no news, and at the ES support level of 885; Bids 
came in rather quickly (either on morning Shorts taking profit or 
dip buying) and ES headed back up to print at the 892-893 level 
near the 4:15 futures close.


Here is a chart of:
NQ (NDX futures) from Monday 9:30 AM to 4:15 PM




Here we can see the NQ holding the strong support at 972.




Let's take a step backward and look at longer term charts.

Here is the Dow Industrials on a 5 day view.

Below is a Chart of:
Dow Industrials (Dow 30) for 5 days last Tues. to Monday (today)




You can see that we are still trapped in this 8300 to 8500 range 
without any clear break either higher or lower.

"Buy the Dips" and "Ignore bad news" are still with us; but was 
the Long confidence ruffled a bit by the Dow failing yet again to 
pierce the 8550 level. Also, that GE piece of news certainly 
wasn't what a Bull wanted to read.

Here is a chart of ES02Z (E-mini SP500 futures) on a 3 Day view:




ES/SPX is still trapped in its 875 to 900 range.




THOUGHTS FOR TUESDAY

With ES closing right in the 889-892 range, tomorrow is tough to 
call. The bears were happy to once again see the Dow could not 
close over the 8500-50 levels, but were perhaps frustrated to 
once again see two strong levels of dip buying today, once at 
11:00 AM and again at 3:30 PM.

The end of month mutual fund window dressing may now have more of 
an impact as T+3 settlement is now over for the month.

Pivot to watch for Tuesday is ES 890.



Alan Hewko

As always, any questions or comments, please email them to

futures@OptionInvestor.com


 


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

Equities take a rest as stock fade toward close

A higher open on upbeat comments from Dell Computer's 
(NASDAQ:DELL) $28.94 -0.34% CEO Michael Dell that the pc-maker 
has seem some rebound in overall demand, along with an upgrade of 
banking giant Citigroup (NYSE:C) $36.30 +1.68% wasn't enough to 
keep investors out of bonds as Treasuries found buyers from the 
early morning that appeared to leave stocks holding the "odd-man 
out" card for today's trade.

While it had been "bad news" seeing buying in recent sessions, it 
was some "good news" that ended up finding sellers today.  

While retailer JC Penny (NYSE:JCP) $19.47 +2.90% raised its Q3 
outlook and for earnings per share to come in at $0.21 versus 
consensus of $0.19 and Wal-Mart (NYSE:WMT) $56.07 -2.19% also 
indicated at a conference that the company expected full-year 
earnings to be a penny better than consensus as recent store 
trends were seeing a pickup ahead of Halloween, the economically 
sensitive S&P Retail Index (RLX.X) 290.60 -2.15% traded just shy 
of 300 at the open and then faded into the close.

As Treasuries found buying for a third straight session and 
retailers edged lower on relatively positive sector move, I'd 
expect today's more defensive action comes ahead of tomorrow's 
consumer confidence numbers that are to be released at 10:00 AM 
EST.  Economists are looking for the Conference Board to report 
October consumer confidence of 90.1, which would be just below 
previously reported 93.3 levels.

Consumer confidence accelerated to the downside following the 
terrorist attacks and the recession, but had been on a path to 
recovery until a recent 4-month decline.  For June, the consumer 
confidence reading came in at 106.3, but has slipped to 97.4, 
94.5 and 93.3 through September.  The Conference Board's index is 
more business heavy than the University of Michigan consumer 
sentiment index.  

The slight DIVERGENCE we noted in this weekend's Index Trader 
Wrap carried forward this morning and gave hint that the early 
bullishness in equities wasn't to hold.  Perhaps one could 
imagine a more defensive move taking place late last week ahead 
of this week's important economic data.  

While we have consumer confidence due out tomorrow, it will be 
Thursday's Q3 GDP data that gets the bulk of this week's 
attention from traders.  If it is true that the MARKET is forward 
looking and "knows all," then I'm not expecting a robust number 
from the GDP data as our quarterly calculation for the S&P 500 
Index (SPX.X) had it falling -17.6% in the third quarter.  

While the strong rebound in October that begins Q4 has been 
bullish, the 10% gain for the SPX has some profits at risk and 
may have equity bulls moving to the sidelines near-term, and 
sitting in bonds ahead of this week's economic data.

Here's a look at the bar charts of the major indexes.  Tonight 
I'm "cleaning up the chart, and only looking at levels taken from 
the point and figure charts.  For some, the Os and Xs of supply 
and demand can be confusing, but the levels remain the same.

Dow Industrials Chart - Daily Interval



In the first hour of trading, the Dow Industrials found selling 
after hitting their peak at 8,531.  That "pattern" in recent 
sessions has been for the Dow to rebound the next day and we'll 
monitor that tomorrow.  However, the relative highs of 8,550 have 
resistance forming below 8,600.  This morning's reversal now has 
near-term support firm just above 8,250, but a break of that 
level and close below the 50-day SMA of 8,232 would leave the Dow 
Industrials vulnerable to the 8,000 level.

Despite today's triple-bottom sell signal in Dow component 
Procter & Gamble (NYSE:PG) $85.75 -3.3% at $87, the Dow 
Industrials Bullish % ($BPINDU) saw a net gain of 1 stock to a 
buy signal as the bullish % grows to 56.67% and remains "bull 
confirmed."  

S&P 500 Index Chart - Daily Interval



While a bearish index trader in the SPX likes what he saw with 
equities losing some steam, it's still important to note that the 
SPX sets a series of higher highs and higher lows.  It's 
difficult to assess anything other than an aggressive upward 
trend in the SPX and the last 6 sessions have been a scattering 
of up and down closes.  The only "reason" to not have bought 
today's break higher was that Treasuries were finding buying, 
which had the upside move somewhat suspect.

In likewise fashion, the SPDRS (AMEX:SPY) $89.61 -0.65% also gave 
a "triple-top buy signal" on their point and figure chart with a 
trade at $91, which found selling as the session progressed.  
First sign of weakness for the SPY is $87.50, which would then be 
a "triple-bottom sell signal," which would then have the "bear 
trap" pattern in play.

The S&P 500 Bullish % ($BPSPX) saw a net gain of 4 stocks to 
point and figure buy signal today, with the bullish % edging up 
to 49.6% from Friday's 48.8% and still "bull alert" status.  

S&P 100 Index Chart - Daily Interval



The OEX traded right "on top" of it's bearish resistance trend of 
460, which is just below horizontal resistance of 464.02 dating 
back to 09/11/02.  Still, the ability for the OEX to make some 
near-term relative highs hints that there is still some 
aggressive buyers present and bears need not be shorting full 
positions.  Be it shorts covering or bulls buying we're never 
sure, but it was difficult to be a new bull this morning with 
Treasuries seeing buying.  Any pullback near 430 would be a 50% 
retracement of the recent rally and a point for any short-term 
bears to be looking for support, especially if we haven't seen a 
reversal lower in the bullish % charts.

NASDAQ-100 Index Chart - Daily Interval



It would be a "dirty rotten trap" if today's trade above 1,000 
had bulls being sucked in on further decline.  I have to admit 
though, words from DELL's CEO that it is seeing some pickup in 
hardware sales is encouraging for technology bulls and helped 
some of the semiconductor-related stock like AMAT and KLAC post 
nice gains.  Semiconductor bellwether Intel (NASDAQ:INTC) $16.83 
+1.44% held the bulk of its gains and is the #2 weighted stock in 
the NASDAQ-100 at a 5.3% weighting.  I still think that for the 
NASDAQ-100 to have any chance at 1,050, MSFT needs to make a 
break above $54 and challenge the $57 level.  MSFT currently has 
a 13.4% weighting in the NASDAQ-100.

While Brocade (NASDAQ:BRCD) $6.83 -17% only has a 0.27% 
weighting, its lowering of Q4 guidance cast some doubt on Cisco 
Systems' (NASDAQ:CSCO) $10.90 -7.47% upcoming earnings release 
for November 6th and near-term business outlook.  Today's cutting 
to "equal weight" by Morgan Stanley didn't help Cisco's stock 
today, as the #4 weighted stock in the NASDAQ-100 was one of the 
weaker index components on the session.

Today's action saw no net change in the NASDAQ-100 Bullish % 
($BPNDX) and current status remains "bull alert" at 55%, which 
has been holding steady since Thursday's after-close reading of 
55%.

Near-term support for the NASDAQ-100 looks to be the 950 level.  
Barring some type of major "upside" surprise from this week's 
economic numbers, it would not surprise me to see a NASDAQ-100 
near 900 into Cisco's November 6th earnings, which would be a 50% 
retracement from the lows of 800.  This type of "900 settle" into 
Cisco's numbers would give market makers a chance to be rather 
"neutral" after the recent run higher.  

NASDAQ Composite volume was brisk today at just over 1.6 billion 
shares, so order flow must have been pretty good.  While we never 
know how many shorts were put on, we do know that you still need 
buyers to implement a short for an uptick, so there's still some 
buyers to be found.

We should remember that the FOMC also meets on November 6th to 
make a decision on interest rates.  

While bears may be eager to buy puts on the indexes with the 
buying we're seeing in Treasuries, we should be cognizant that 
there may be some bond bulls trying to position themselves ahead 
of a potential rate cut at this meeting.  The 30-day fed fund 
futures finished the session at 98.25 and hints the MARKET does 
not expect a rate cut at this meeting (100-98.25 = 1.75, which is 
current Fed Funds rate set by FOMC). 

On a broader scale, one thing I found interesting today and 
somewhat bullish for the NASDAQ was that by session's end, the 
new highs versus new lows for the NASDAQ Composite (COMPX) 1,315 
-1.14% posted a more bullish 53 stocks trading a new 52-week high 
versus 50 stocks trading a new 52-week low.  This is the first 
time in quite some time that I've seen this and could be a very 
early sign that the NASDAQ-Composite is trying to form some type 
of bottom.

Jeff Bailey

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

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.
Anything else is too slow!

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


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

Make That Three in a Row


The U.S. equity markets notched their third straight weekly gain 
last week despite some mixed earnings and economic reports.  For 
the week ended Friday, October 25, 2002, the S&P 500 index had a 
1.5% total return, led by strength in the utility and technology 
sectors.  
 



The midcap sector as represented by the S&P Midcap 400 index had 
a 1.3% total return for the week, slightly lagging the large-cap 
index benchmark.  Meanwhile, small caps enjoyed a good week with 
the Russell 2000 index producing a 2.6% weekly total return.  

Overseas, both European and Pacific stock indices were lower for 
the week, resulting in a negative 1.2% total return for the MSCI 
EAFE developed foreign markets index.  The possible unwinding of 
Europe's growth and stability pact and uncertainty about Japan's 
banking reform process contributed to losses in those markets as 
emerging market indices gained ground.  

Weaker economic reports during the week contributed to gains in 
the fixed income markets with short-term, intermediate-term and 
long-term maturity sectors all participating in the weekly rise.  
The total investment-grade bond market as measured by the Lehman 
Aggregate Bond index had a positive 0.4% total return for the 5-
day period using Vanguard's index fund as the market benchmark.


Lipper Equity Fund Indices


All of Lipper's equity fund averages were higher last week with 
the exception of international funds, which produced losses for 
the week.  The best and worst five equity indices for the 5-day 
period as of Friday, October 25, 2002 are summarized below.

 Best Five Equity Fund Indices:
 +4.6% Science & Technology Funds (YTD -41.8%)
 +2.3% Small Cap Growth Funds (YTD -28.1%)
 +2.2% Mid Cap Value Funds (YTD -16.4%)
 +2.1% Small Cap Core Funds (YTD -20.9%)
 +2.0% Multi Cap Value Funds (YTD -19.1%)
  
 Worst Five Equity Fund Indices:
 -0.8% International Funds (YTD -16.2%)
 +0.9% Large Cap Core Funds (YTD -19.4%)
 +1.0% Balanced Funds (YTD -11.6%)
 +1.0% Equity Income Funds (YTD -17.4%)
 +1.1% Emerging Markets Funds (YTD -9.0%)
  
Science and technology funds were the week's top performers with 
an average total return of 4.6%.  Weekly returns within the tech 
sector ranged from a low of 1.0% for the Waddell & Reed Advisors 
Science & Technology A Fund to a high of 8.5% for the Firsthand 
Technology Value Fund.  Fidelity's Select Technology and Select 
Electronics closed the week with total returns of 5.6% and 7.8%, 
respectively, while the group largest fund T. Rowe Price Science 
& Technology (PRSCX) produced a 5.1% weekly gain.

Utilities were also higher as evidenced by the 4.8% weekly total 
return from Prudential Utility A, the sector's largest fund with 
$2 billion in assets today.

Fidelity Aggressive Growth and White Oak Growth Stock were among 
the large-cap equity leaders, both earning a 4.5% rate of return 
for the week.  In the midcap group, Vanguard Capital Opportunity 
posted a 1-week return of 4.2% while Legg Mason Opportunity Fund 
gained 5.1%.  Managers Special Equity Fund was one of the better 
performing small-cap growth funds, finishing up 3.3% on the week.

Not all foreign and world stock funds were down last week.  A few 
value driven funds, such as ING International Value A and Nations 
International Value A, produced positive weekly gains of 1.4% and 
1.9%, respectively, but they were the exception.  Putnam's Global 
Growth Fund lost 1.6%, underperforming the world stock fund group 
while Oakmark International sustained a 2.3% weekly loss, lagging 
the foreign stock category.  

 
Lipper Fixed Income Fund Indices


Lipper's bond fund averages indicate a soft week for municipal 
bond markets, while all of the taxable fixed income categories 
finished the week higher.  Investors favored yield over credit 
quality last week as evidenced by the higher total returns for 
global/international and high-yield funds.

 Best Five Fixed Income Fund Indices:
 +0.7% International Income Funds (YTD +10.4%)
 +0.6% Global Income Funds (YTD +6.0%)
 +0.5% High Current Yield Funds (YTD -9.5%)
 +0.5% Intermediate Investment Grade Funds (YTD +4.4%)
 +0.4% Corporate A-Rated Debt Funds (YTD +4.8%)
 
 Worst Five Fixed Income Fund Indices:
 -0.4% General Muni Debt Funds (YTD +5.2%)
 -0.3% High Yield Muni Funds (YTD +3.0%)
 +0.0% Short Municipal Funds (YTD +2.5%)
 +0.2% Short Investment Grade Funds (YTD +2.7%)
 +0.3% U.S. Government Funds (YTD +7.6%)

PIMCO Total Return Fund (+0.55%) and American Funds Bond Fund of 
America (+0.64%) were among the week's top performers, outpacing 
the Lehman Aggregate Bond index and intermediate-term investment 
grade average.  Other popular general bond funds doing well last 
week were Hartford Bond HLS IA (+0.89%), Harbor Bond (+0.85) and 
Fremont Bond (+0.75%).  The later two funds are both sub-advised 
by bond guru William Gross (PIMCO).

The municipal bond markets struggled for a second straight week, 
with some funds losing up to 0.5% over the week.  Vanguard High-
Yield Tax-Exempt Fund, for instance, lost 0.5%, among the week's 
laggards.


Largest Mutual Funds


The largest diversified equity funds in America produced returns 
of up to 2.5% during the 1-week period as of Friday, October 25, 
led by American Funds Growth Fund of America (AGTHX), which buys 
growth stocks at value prices.  Vanguard Windsor II Fund's yield 
driven approach produced a weekly 2.4% total return, benefitting 
from strength in the utility sector.    
 
 Largest Stock Funds:
 +1.5% Vanguard: 500 Index (VFINX) YTD -20.9%
 +1.2% Fidelity: Magellan (FMAGX) YTD -20.3% 
 +1.2% Investment Company of America (AIVSX) YTD -15.7%
 +1.0% Washington Mutual Investors (AWSHX) YTD -16.1%
 +2.5% Growth Fund of America (AGTHX) YTD -20.4%
 +0.0% Fidelity Contrafund (FCNTX) YTD -6.6%
 +0.3% Fidelity Growth & Income (FGRIX) YTD -15.4%
 -0.4% EuroPacific Growth (AEPGX) YTD -16.0%
 +1.4% New Perspective (ANWPX) YTD -17.7%
 +2.4% Vanguard Windsor II (VWNFX) YTD -17.3%
 
 Largest Bond Funds:
 +0.6% PIMCo Total Return (PTTRX) YTD +6.5%
 +0.4% Vanguard GNMA (VFIIX) YTD +7.7%
 +0.4% Vanguard Total Bond Market (VBMFX) YTD +5.1%
 +0.6% Bond Fund of America (ABNDX) YTD -0.5%
 +0.4% Vanguard Short-Term Corporate (VFSTX) YTD +2.6%
  
 Largest Balanced Funds:
 +0.8% Vanguard Wellington (VWELX) YTD -9.2%
 +0.9% Income Fund of America (AMECX) YTD -8.8%
 +0.8% Fidelity Puritan (FPURX) YTD -9.9%
 +1.7% American Balanced (ABALX) YTD -9.4%
 +1.8% Fidelity Asset Manager (FASMX) YTD -9.0%

The largest bond funds in the country bounced back last week to 
produce weekly total returns of up to 0.6%, with bond investors 
willing to take greater credit risk in pursuit of higher yields 
and total return.  American Balanced and Fidelity Asset Manager, 
meanwhile, significantly outperformed their balanced fund peers 
for the week.     


Money Market Funds


iMoneyNet's all-taxable money market fund average slid another 
basis point (0.01%) to 1.20% for the 5-day period thru October 
22, 2002.  The highest 7-day simple yields among "prime retail" 
funds remain PayPal MMF (1.78%) and Touchstone MMF (1.76%). 

Fidelity Cash Reserves and Vanguard Prime MMF, two low-expense 
bellwethers, have current 7-day yields of 1.50% and 1.47%, per 
iMoneyNet.com, respectively.  Both funds slipped a basis point 
during the most recent weekly period.

According to Bloomberg, the Fed Funds rate was 1.81% at week's 
close.  Three-month LIBOR stands at 1.82%.  Both are key money 
market rates.

 
Mutual Fund News


Morningstar reports that there may be some bidding going on for 
the assets of the Berger Funds, a sister company to Janus Funds 
that shined in the pro-growth led market of the late 1990's and 
like Janus' growth driven funds, has since fallen on hard times.  
Fred Alger, American Century, and Turner Capital Management are 
some of the fund families in competition with Janus Capital for 
control of the nearly $1.2 billion in Berger growth fund assets, 
the Morningstar report said. 

Janus announced last month it would take over its parent company, 
Stilwell Financial SV, which also controls the Berger Funds, and 
as part of that move, keep Berger's value-driven funds and merge 
their growth-oriented funds into other Janus growth funds.  This 
prompted Berger's board of trustees to entertain offers for their 
growth funds. 

In other news, T. Rowe Price has introduced four lifecycle funds, 
similar to Fidelity's popular Freedom Fund series.  These "funds 
of funds" will adjust their asset allocation mix from aggressive 
to conservative as they reach preset retirement dates (from 2010 
to 2040).  A fifth life-cycle offering, T. Rowe Price Retirement 
Income Fund, is designed for retired investors seeking a monthly 
income stream.  

Jerome A. Clark, current manager of T. Rowe Price U.S. Long-Term 
Fund (PRULX) will manage the life-cycle portfolios using T. Rowe 
Price stock, bond and money market funds in varying combinations 
to produce the desired risk profile at various life-cycle stages.  
Like the Fidelity Freedom Funds series, these funds of funds will 
likely be popular with T. Rowe Price investors.

Fremont Funds announced it will close Fremont U.S. Micro-Cap Fund 
(FUSMX) when assets reach $400 million.  With $406 million in net 
assets today, it may already be too late for new investors to get 
into this Morningstar 4-star rated small growth fund.  Meanwhile, 
Touchstone Investments has launched a small cap growth fund named 
Touchstone Small Cap Growth Fund, bringing its total mutual funds 
to 18.  Longwood Investment Advisors will run 70% of the adviser-
sold portfolio with Bjurman, Barry & Associates running the rest, 
Morningstar reported.
  
That's it for this week's Weekly Fund Wrap.  Have a great week.  


Steve Wagner
Editor, Mutual Investor 
steve@mutualinvestor.com
 

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

Reversal of Fortune
by Mark Phillips
mphillips@OptionInvestor.com

A few weeks back, we did an in depth study of relative strength,
focusing on the Banking index (BKX.X) relative to the S&P 500
(SPX.X) and the Biotechnology (BTK.X) and Semiconductor indices
relative to the NASDAQ Composite (COMPX).  At the time, we
concluded that the BTK was exhibiting relative strength and the
SOX was showing relative weakness, as compared to the rest of
the Technology arena.

There's been a lot of water pass under the bridge in the past 3
weeks, with the broad market putting in a solid (even if it is
temporary) bottom, and the Chip stocks attempting to regain
their former leadership role.  It has been truly impressive how
traders have shrugged off the negative daily news flow in the
sector, and have stubbornly bid shares of these former tech
darlings higher to the tune of more than 40%.  At the same time,
the BTK index has essentially been treading water for the past
couple weeks, as capital has flowed to other sectors of the
market. Wouldn't it be interesting to see how those Relative
Strength charts have changed in the intervening time?

For reference to our original discussion, click on the following
link.

Relativity  It's Not Just For Phsycists

Given the strong rebound in the SOX over the past 3 weeks, it
should come as no surprise that the picture on the Relative
Strength chart would have changed somewhat.  Here's the SOX/COMPX
chart we used before, with the same channel lines in place.

Relative Strength Chart of SOX index vs. NASDAQ Composite



Not only did the SOX/COMPX Relative Strength chart rebound again
from the bottom of the channel, this time, it looks like it may
have actually achieved a breakout in the past 2 days.  This is
the strongest the SOX has looked relative to the overall
Technology sector since May.  But we need to keep in mind that
the move has been largely driven by short-covering up to this
point.  The real question will be whether the SOX can continue
to outperform, or if it is time to fall back inside the channel.
What does this tell us about the near future for the SOX and
how to trade it?  

Given the continuing stream of abysmal news in the sector, I
wouldn't even consider a bullish play right here.  But if the
bad news and lack of positive earnings/forward guidance starts to
weigh on the sector, we could use a break back into the channel
on the RS chart above as a confirmation of weakness and initiate
a bearish trade on the SOX or on one or two of its weaker
components.  You already know how to find those weak components
right?  Pull up a RS chart of INTC or KLAC or TXN relative to
the SOX and you'll have a nice picture showing what is weak and
what is relatively strong.

Now let's look at the Relative Strength of the Biotechnology
sector (BTK.X)

Relative Strength Chart of BTK index vs. NASDAQ Composite



Isn't it interesting that the level (green line) that provided
support on the RS chart appears to be coming into play again.  So
long as this level holds as support, it keeps the RS breakout
from late July intact.  The BTK has essentially been treading
water between 340-360 for the past couple weeks, as capital has
flowed to other sectors that are playing catch up.  We can use
this information a couple of different ways.  

If looking bullish on the BTK (or some of its stronger
components), we want to see the green line continue to serve as
support, for a rebound of the RS chart over the highs posted in
early October.  Alternatively, if the RS chart starts to break
down below support, we could view that as an opportunity to
either short the BTK or go long the broader NASDAQ.  See how
that works?  If you really wanted to get fancy, you could put
on a cross-market spread, buying the strong and selling the weak.
That's a bit of an advanced topic though, so let's set it aside
for today.  I'll look to address that strategy in a future
Options 101 column.

Finally, let's go back to the Relative Strength chart of the
Banking index (BKX.X) vs. the S&P 500 (SPX.X).  This chart is
perhaps the most intriguing of the three we are looking at today.

Relative Strength Chart of BKX index vs. S&P 500 index



Following the breakdown on October 3rd, the BKX/SPX relative
strength chart fell right to where it bottomed back in July,
setting up the potential for a solid double bottom.  But in order
for the double bottom formation to be confirmed, the RS chart
needs to take out its prior high.  Isn't it interesting how the
level of resistance keeps holding firm at roughly 0.86?  Unless
the bulls can push build some strength in that sector, this RS
chart is likely to remain rangebound.  And that sets up a couple
of different scenarios that we can watch for.  

If the RS chart rolls over from resistance, then aggressive
bears could target short positions on some of the weaker banking
stocks.  Here's a hint -- look at some of the names that have
recently been warning about growing loan losses.  This is a
problem that won't disappear overnight, and now that the
short-covering rally has likely run its course, they should make
for attractive put plays.  Of course, the bulls have been pretty
stubborn lately, as selling pressure in the broad markets seems
to have come down quite a bit.  A breakout in the RS chart above
could be signaling further upside in the Banking group, and then
we would want to be looking at calls on some of the stronger
Banks.  Look at a RS chart of BAC or GDW relative to the BKX
index.  Despite the volatility in the overall sector, these
stocks continue to exhibit relative strength, making them viable
bullish targets on pullbacks.'

I know I've been talking about Relative Strength a fair amount
lately, and hopefully I haven't put you to sleep too many times.
The point is that the RS charts frequently will clue us into
strength or weakness before it is apparent on the standard price
charts.  Just remember, that once we find an attractive trade
candidate on a RS basis, we then have to do our normal due
diligence in looking at the equity or index we are planning on
trading, using our standard technical indicators and searching
for important upcoming events that could affect the trade.
Using Relative Strength just gives us a leg up on finding those
juicy trade candidates.

Next week, we're going to talk about a new twist on Bullish
Percent charts, that I'm willing to bet you haven't considered
before.  I know I hadn't until the idea was brought to my
attention by one of our many intelligent readers.  Make sure you
don't miss it!

Happy Hunting!

Mark

************************Advertisement*************************
If you trade options online, then you need an online broker that:
offers true direct access to each option exchange offers stop and
stop loss online option orders offers contingent option orders
based on the price of the option or stock offers online spread
order entry for net debit or credit offers fast option executions

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

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


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

Sell The News Good News

Michael Dell made some positive comments about "some rebound 
in overall demand" in the PC sector and after a positive open 
stocks sold off. MRK and C were upgraded before the open and 
IBM announced zero percent financing. MRK/SGP announced 
another potential blockbuster drug but the combination of all 
those events could not keep the Dow from losing -75. 
Buy bad news, sell good. 

To read the rest of the Swing Trader Game Plan Click here:
http://www.OptionInvestor.com/itrader/indexes/swing.asp


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

_7 Steps to Success _ Trading Options Online_.

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

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


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

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

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


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

To subscribe you may go to our website at

www.OptionInvestor.com

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

 "Contact Support"

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

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


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

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


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

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

Contact Support

The Option Investor Newsletter                   Monday 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

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

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

Anything else is too slow!

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


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

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.


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

_7 Steps to Success _ Trading Options Online_.

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

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


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



************************Advertisement*************************
If you trade options online, then you need an online broker
that:
offers true direct access to each option exchange
offers stop and stop loss online option orders
offers contingent option orders based on the price of the
option or stock
offers online spread order entry for net debit or credit
offers fast option executions

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

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


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

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


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

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

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


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

To subscribe you may go to our website at

www.OptionInvestor.com

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

 "Contact Support"

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

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


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

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


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

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

Contact Support

DISCLAIMER

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

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

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

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives