Option Investor

Daily Newsletter, Monday, 11/04/2002

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The Option Investor Newsletter                   Monday 11-04-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Higher Ground, But For How Long?
Futures Wrap: Exhaustion Top!
Index Trader Wrap: Positive finish with a fade into the close
Weekly Fund Wrap: Fourth Week of Gains
Traders Corner: Today’s Menu: Open Interest, Option Volume 
& Taking Profits
Traders Corner: New Perspective On Bullish Percent Charts

Updated on the site tonight:
Swing Trader Game Plan: Oops!

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
11-04-2002                  High    Low     Volume Advance/Decl
DJIA     8571.60 +  53.96  8730.64 8521.60   1972 mln  1336/621
NASDAQ   1396.54 +  35.84  1320.25 1279.46   2358 mln  1917/405
S&P 100   462.26 +   4.10   470.58  458.16    totals   3253/1026
S&P 500   908.35 +   7.39   924.58  900.96
RUS 2000  386.97 +   6.29   391.34  383.45
DJ TRANS 2333.84 +  18.16  2372.41 2318.47
VIX        34.47 +   0.49    34.85   32.45
VIXN       49.22 -   0.64    49.64   46.96
Put/Call Ratio 0.73

Higher Ground, But For How Long?
by Steven Price

I can hear the bulls screaming "I told you so!" It's tough to 
argue with them after the Dow has pasted on 1400 points in 3 1/2 
weeks.  However, why do we keep reading about more spending cuts, 
low demand and declining revenues?  Because businesses have yet 
to increase spending budgets, and demand is still soft.  While 
the market is going up, it is awfully hard to jump on for 
anything more than the short term.  We did, in fact, cross some 
significant resistance today, but ran smack into more.  The Dow 
jumped over 200 points intraday, following Microsoft up $4.25 at 
one point.  However, the rally collapsed toward the close, with 
the blue chips finishing up 53.96 on the day.

On a macro scale, the recent Dow rally began October 10, pulled 
back, found support at the 50-dma, and then took off to higher 
ground.  When I see a stock with this type of chart, I think 
"long play."  So why am I not singing the praises of long term 
calls?  It doesn't take a genius to understand that when 
companies reduce spending, workers lose jobs and suppliers don't 
see much income. When suppliers see reduced income, they let 
employees go.  When consumers lose jobs, they don't go shopping
as often.  When they don't shop, stores don't sell, and don't 
need as many employees. Consumer spending makes up 2/3 of GDP...  
By now you get the point. 

I certainly don't want to rain on the parade.  Those traders who 
have played long for the last few weeks have a nice profit and 
should be aware of the big picture heading into the next couple 
of days. The elections on Tuesday bring with them the possibility 
of republicans taking control of the Senate.  This is seen as 
bullish for the market, as republicans are generally more 
sympathetic to big business.  Following the elections is 
Wednesday's FOMC meeting, where the Fed is expected by many 
investors to lower the Fed Funds rate by 25 basis points, to 
1.5%. The December Fed Fund futures are pegged at 1.395%, not 
only predicting one cut of 25 points, but possibly an additional 
cut before year's end.  Certainly both of these developments 
could be positive for the market; however, it seems there is 
still plenty of work to do before the overall business 
environment sees significant improvement. 

Let's start with a look at what we've accomplished so far.  The 
Dow bottomed on October 9 at 7197, before catching fire and 
blasting its way to current levels.  Once it got through 8000, it 
was straight up to resistance at 8300 and then consolidation 
between 8200 and 8550.  A look back at the old head and shoulders 
formation between July and September gives us a good picture of 
recent resistance levels and has been fairly reliable. If the 
index can break through 8750, where it stalled out today (high of 
8730), then 9000 appears to be the next step.  Certainly it does 
us no good to be bearish the whole way up, so jumping on for the 
moves between levels and then reducing as we get close to 
resistance or support seems to be the best strategy. Right now 
the rally stalled below resistance and landed above support at 
8550, so that is the current range. This corresponds to support 
of 900 in the SPX, which formerly served as resistance.  However, 
with the events of the next two days, it is likely we will test 
those bounds. The wild card in all of this is pegging just how 
much effect we are seeing from the aforementioned events on 
Tuesday and Wednesday. 

Chart of the Dow

Why all the hoopla over the rate cut?  There are several reasons.  
First, lower rates make business investment cheaper.  If a 
business can borrow at a lower rate, it makes it cheaper to 
finance a new factory, accumulate inventory, or upgrade current 
facilities.  One of the biggest problems we've seen is the 
reduction of spending in the business world and all other things 
being equal, a rate cut should help.  The other factor that could 
be playing into the bullishness in individual stocks is that it 
may help debt ratings.  Moody's cut the credit ratings of 69 
companies last month, which was the third highest total since 
1986.  The ratio was also 6.9:1 for downgrades to upgrades. If 
that rate continues through the quarter, it will be the worst on 
record. Lower rates can help corporate creditworthiness, similar 
to the way lower mortgage rates have allowed more people to 
purchase homes. According to Moody's chief economist, "If the 
Federal Reserve cuts rates, that improves the outlook for corporate 
credit ratings.  It should increase the supply of liquidity, and 
suppliers of credit might be willing to assume more risk."  A better 
credit rating makes it cheaper to finance current debt as well, 
adding to a company's bottom line. 

The techs got mixed news today.  Dell said it expects strong growth 
in servers and "the phenomenal growth" in services to continue, as 
the company continues to standardize technology. It also said it is 
taking a look at routers and security gear. On the flip side of this 
news, Salomon Smith Barney downgraded the chip equipment sector, 
saying the elevated prices the group has reached recently will 
put it in line with the market movement from here on out. In 
addition, the Semiconductor Industry Association had some mixed 
data to report, as well.  The organization said that third 
quarter global semiconductor sales grew 21% from last year's 
levels. That is certainly good news, and has fueled the recent 
rally in the Semiconductor Index (SOX).  However, growth is 
expected to stall for the quarter, as sales grew a paltry 3% in 
September. In addition, some of the biggest names in the industry 
have predicted a slowdown. These include Texas Instruments, which 
expects a 10% revenue drop in the fourth quarter, and Intel, 
whose flat to 6% growth forecast is far below normal. The 
Association releases its 2003 outlook on Wednesday, which is 
expected to be reduced from the current projection of more than 
20%. Applied Materials (AMAT) also announced it was laying off 
11% of its workforce, in an attempt to adjust to a two year slump 
in chip demand. This afternoon, Steve Jobs, CEO of Apple Computer 
(AAPL), said he has been hearing about a tech recovery 6 months 
out for the last two years, and they still have yet to see a 
turnaround in the PC market.  Prudential also said that a tour of 
Chinese EMS facilities showed that demand remains lackluster, and 
still suffers from near term pricing pressure.  A look at the SOX 
shows how the current upward trend is continuing, but faded with 
the rest of the market this afternoon. There is blue sky up until 
about 360 in the index when we look at the chart, but after a 
gain of 52% in less than a month, along with slowing growth, it 
seems that longs should beware of a stall. 

Chart of the SOX

This morning also brought several downgrades of the retail 
sector. As we head toward the holidays, the recent economic data 
doesn't look promising. Personal spending is down; personal 
income increased less than expected; payrolls are down and 
Consumer Confidence is atrocious.  If one sector is likely to 
feel the effects of these things more than others, it would seem 
to be the retailers. We started to get monthly sales warnings 
back in the summer, with stores repeatedly missing forecasts.  
These misses were blamed on a number of factors, mostly the 
weather (weather is always a factor in apparel sales).  However, 
eventually companies began dropping sales targets, including Wal-
Mart, which has cut them in half.  One of the downgrades, May 
Department Stores (MAY), warned that third quarter earnings would 
come in below expectations.  It said earnings would be $0.08-

$0.10, approximately half of the mean estimate of $0.17. Most 
importantly, MAY reported third quarter sales fell 4% from last 
year, and there was also a 4% drop in October sales. Same store 
sales also dropped 7% in October.  This is clearly an ominous 
sign heading into the holiday shopping season, since last year we 
were suffering the September 11 hangover.  The fact that shoppers 
are purchasing even less this year speaks volumes about spending 
habits and the results of the economy.  Recent retail darling 
Kohl's (KSS) was also downgraded, based on decelerating earnings 
growth and valuation. Goldman Sachs said it was cautious on the 
hard line retail sector, which includes Home Depot and Lowe's, 
citing "daunting" near-term comparisons and few organic growth 
opportunities.  Many retailers will release monthly data on 
Thursday, so we should get a better look at the sector then.  A 
drop in temperatures at the end of October has increased sales in 
some areas, but the trend heading into the biggest sales season 
of the year will not be dependent on the weather. 

So, why all the bearishness here?  Because if we don't get a 
republican Senate and a 50 basis point rate cut, then we will 
only be left to ponder the economic data and business 
environment. We will most likely see a market on hold until 
election results begin to creep in tomorrow. With the fed meeting 
the next day, it will be interesting to see just how committed 
investors are until Wednesday afternoon.  It seems that whatever 
bullish sentiment there was to start the week quickly faded as 
the sellers sold today's rally.  I would initially think the 
rally failure was bearish, but there is no argument that we broke 
into higher ground, above Dow 8550.  Bears should be careful with 
anything more than a 1/2 position here and look for not only a 
breakdown under 8550, but resistance there, as well.  Bulls 
should look to take some profits if another rally stalls at 8750.  
While I'm still bearish overall, the next two days are recently 
uncharted water, so trade what you see, not what you think you 
should be seeing. 


Attn: OIN Futures Traders

The futures section is undergoing some changes in format
and methodology. We have received many comments from readers
with many suggestions for improving the content you have
been receiving. We are responding to those changes but
would like to try and get a better idea of what you would
like to see in the commentary, trade suggestions and 
educational articles. 

We want to give you the trading vehicle you desire. Unfortunately
you must tell us exactly what you want. We do not want to build
it only to have everyone complain that it does not fit their

You are in control. Decide what you want and send us a descriptive
email with plenty of details. Do not be shy!

Do it today while it is fresh in your mind.

Send your comments and suggestions to:


Until we get a better idea of exactly what you want the futures
wrap will be more of just a recap of the days action and projected
support and resistance levels for the next trading day. We will
expand on the amount of content once we launch the Futures Monitor
and begin offering trade signals again.

Exhaustion Top!

For a trading day in futures it would have been very simple. Buy 
before the open and short the top which on the cash indexes was
very clear at Dow 8730, Nasdaq 1420. There was not much indecision
and a really nice move. 

For Tuesday it appears we could open up with 912 on the SP02Z being
resistance and 905 being support. If 905 breaks 900 becomes critical 
support. A break under 900 puts us back into the trading range 
from the last two weeks with exposure to strong support at 880. 

S&P Futures Chart - Daily

S&P Futures Chart - Intraday

The NDX held just above 1040 at the close and could see 1050
again on Tuesday if we get some positive news. The more likely 
possibility is a break of that 1040 support and a test of 1033.
Should 1033 break we could see a gap fill back to 1020. I think
a conservative move would be to short the NQ02z on a break below
1033 with a target of 1023. 

NDX Futures Chart - Daily

NDX Futures Chart - Intraday

The Dow futures closed back under resistance at 8580 and actually
traded below Friday's highs. There is strong overhead resistance
at Dow cash 8600 and I would short any breakdown in the Dow
cash under that level. The odds are very good that we will 
sell off before the Fed meeting and drop back to 8400 support 
for the YM02Z which would be my target. 

Dow Futures Chart - Daily

Dow Futures Chart - Intraday

We have seen a very strong spike with a pull back on all fronts
and a further pull back likely before the Fed meeting. I would
short any rally failure on Tuesday with targets as stated above. 

Jim Brown


Positive finish with a fade into the close

The major market indexes finished in positive territory after 
giving back the bulk of earlier session gains on renewed fear 
that American troops may still be headed for war.

With just over an hour left in trading, bulls had the major 
indexes pegged near their highs when Defense Secretary Donald 
Rumsfeld renewed war fears when he said he would expect that 
there could be military reserve call-ups in the near future, 
suggesting Washington continues to prepare for war against 
Baghdad, Iraq.

Dow Industrials Chart - Daily Interval

Today's trade at 8,550 got the Dow's point and figure chart back 
on a "buy signal" and turns the longer-term vertical count back 
to bullish and currently hints at 9,750.  Near-term resistance 
was hit today at 8,717, but bulls will be looking for firm 
support at 8,170.  Today's comments from the Defense Secretary 
were simply a reality check for the market, as it is little 
surprise to any subscriber that the potential for war with Iraq 
is a possibility.  

Dow components American Express (NYSE:AXP) $37.53 +3.5% and AT&T 
(NYSE:T) $13.89 +2.73% both generated reversing point and figure 
buy signals today, which has the Dow Industrials Bullish % 
($BPINDU) growing to 63.33%, which has the bullish % exceeding 
August's relative high reading of 60%.  Until a reversal lower in 
the bullish % is found, to 58%, upside to Dow 9,000 currently 
looks achievable.

S&P 500 Index Chart - Daily Interval

The S&P 500 (SPX.X) tested our downward trend on the bar chart 
for the first time and failed to close above that trend.  While 
today's comment from the Department of Defense may have 
extinguished some of the bullishness building, bulls may be well 
served to have taken some partial gains off the table as near-
term support would be assessed to the 880 level and 61.8% 
retracement.  Again, the FOMC meeting provides uncertainty as to 
what the Fed is actually going to do regarding interest rates and 
just how the MARKET is going to respond.  Fed fund futures have 
the MARKET fully counting on a 25-basis point cut and a 25% 
chance of a 50-basis point cut.  After giving a sell signal at 
875 and trading a relative low near 870, the first sign of 
weakness on the p/f chart for the SPX would be a trade at 875.  

Today's action saw a net gain of 24 stocks generating point and 
figure buy signals (+4.8%), which has S&P 500 Bullish % ($BPSPX) 
still in "bull alert" status, but now at 54.8%.  It would 
currently take a reading of 60% to have the S&P 500 Bullish % 
reaching "bull confirmed" status.  Conversely, it would take a 
pullback to 48% to have the SPX back in "bear confirmed" status.

S&P 100 Index Chart - Daily Interval

Today's trade at 465 was enough to have the OEX breaking above 
its point and figure chart's longer-term bearish resistance trend 
and triggering a spread-triple-top buy signal.  It was somewhat 
disappointing to see the OEX close back below the 465 mark, but 
difficult to interpret the MARKET'S psychology.  Does go to show 
just how quick investors are willing to buy then sell and very 
driven by news events.  First sign of trouble for bulls would be 
a close below 440.

While the above major indexes came nowhere near the upper-ends of 
their Bollinger Bands, the NASDAQ-100 Index (NDX.X) 1,047 +2.7% 
came within a frog's hair of doing so and matched this summer's 
highs and upper end of our retracement bracket as index 
heavyweight Microsoft (NASDAQ:MSFT) $56.09 +5.83% did trade 
within 10-cents of its Bollinger Band of $57.35.

Today's action saw the S&P 100 Index generating a net gain of 6 
stocks to point and figure buy signal, which now has the S&P 100 
Bullish % ($BPOEX) "bull confirmed" at 60%.  In March of this 
year, this indicator reached a high reading of 78%, while more 
historical norms find bullishness waning just shy of 70%.  Major 
move higher from early October's 18% reading.  

Several subscribers have sent me e-mail that they "loaded the 
boat" with puts last week and are getting sideways.  As mentioned 
before, only 1/4 or 1/2 bearish positions while the bullish % are 
still in a column of X.  On ANY OEX pullback near 450, get 
yourself squared up.

NASDAQ-100 Index Chart - Daily Interval

In August, the NASDAQ-100 Index had a tendency to edge higher 
along the upper-end of a Bollinger Band (21-day SMA, +/- 2 std. 
dev).  The greater tendency of market makers to "back away" from 
offers in these NASDAQ listed stocks may indeed be reason for 
NASDAQ stocks to be nearest their upper Bollinger Bands.  

Today's action had the NASDAQ-100 generating a net gain of 7 
stocks to point and figure buy signals and has now achieved "bull 
confirmed" status at 66%.  This exceeded August's reading of 60% 
and still some room to a more "overbought" level of 70%.

Jeff Bailey

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Fourth Week of Gains

Stocks finished the week in positive turf, marking the fourth 
consecutive week of gains on Wall Street.  Vanguard 500 Index 
Fund (VFINX), which tracks the S&P 500 large-cap index, had a 
0.4% weekly total return.  Many equity funds finished the week 
ahead of the index fund bellwether, with returns increasing as 
you moved down in market cap.  Vanguard Midcap Index and Small 
Cap Index funds were up 1.1% and 2.9%, respectively, last week. 

Lipper's weekly fund indices reflect strong performances by gold 
funds (+4.1%), science and technology funds (+2.8%) and smallcap 
core funds (+2.2%) last week.  Funds that had large exposures to 
utility, telecommunications and technology stocks were among the 
leaders for the week.  The only equity fund category not in the 
black for the week was large-cap growth funds, which declined by 
0.5% on average.  The average international stock fund increased 
in value by 1.5 percent last week.

There was enough weak news economically to keep the recent rally 
in the fixed income markets going.  All Lipper bond fund indices 
enjoyed weekly gains including high yield bond funds, up 1.3% on 
average last week.  Global and international fixed income funds 
were among the week's best performers, gaining 1.3% and 1.8% on 
average, respectively.  A weaker dollar versus Brazilian Real, 
Swiss Franc, Swedish Krona and Euro last week padded the total 
returns of global and international funds.

Reuters says that almost all Wall Street dealers believe the Fed 
is "poised to make a small cut in interest rates this Wednesday 
for the first time in eleven months, to keep a floundering U.S. 
economy afloat."  Meanwhile, the Fed funds rate closed the week 
at 1.75%; unchanged for the week.

Lipper Equity Fund Indices

It was a good week for the vast majority of stock mutual funds, 
according to Lipper's equity fund indices, especially for small 
cap funds and tech sector funds.  The best and worst categories 
for the week ended Friday, November 1, 2002 are shown below.

 Best Five Equity Fund Indices:
 +4.1% Gold Funds (YTD +35.5%)
 +2.8% Science & Technology Funds (YTD -40.2%)
 +2.2% Small Cap Core Funds (YTD -19.2%)
 +2.0% Small Cap Value Funds (YTD -12.6%)
 +1.7% Small Cap Growth Funds (YTD -26.8%)
 Worst Five Equity Fund Indices:
 -0.5% Large Cap Growth Funds (YTD -24.6%)
 +0.2% Large Cap Core Funds (YTD -19.2%)
 +0.5% Multi Cap Core Funds (YTD -20.4%)
 +0.5% Multi Cap Growth Funds (YTD -27.3%)
 +0.7% Emerging Markets Funds (YTD -8.4%)

The $16 billion Janus Fund contributed to the 0.5% average loss 
in the large-cap growth category.  It tumbled 2.7% for the week.  
Fidelity Growth & Income Fund and Fidelity Contrafund both ended 
the week with losses, weighing the large-cap core category down.

Royce Low Priced Stock Fund (RYLPX) was among last week's small-
cap winners, producing a 3.9% return for the week for investors.  
Fidelity Select Electronics (FSELX) was one of the tech leaders, 
up 5.7% for the trailing 5-day period.  

Lipper Fixed Income Fund Indices

Fixed income funds had a great week, with weekly total returns 
ranging from a low of 0.4% for short-term municipal funds to a 
high of 1.8% for international fixed income funds, per Lipper.  
Vanguard Total Bond Market Fund (VBMFX), which tracks the total 
return of the Lehman Aggregate Bond index, finished the week up 
0.7 percent.  Weekly returns increased as you moved out in bond 
duration, with the intermediate-term and long-term bond indices 
up 1.2% and 1.3%, respectively, last week using Vanguard's bond 
index funds as proxies.

 Best Five Fixed Income Fund Indices:
 +1.8% International Income Funds (YTD +12.4%)
 +1.3% Global Income Funds (YTD +7.3%)
 +1.3% High Current Yield Funds (YTD -8.4%)
 +1.2% General Muni Debt Funds (YTD +6.5%)
 +0.9% Intermediate Investment-Grade Funds (YTD +5.3%)
 Worst Five Fixed Income Fund Indices:
 +0.4% Short Municipal Funds (YTD +2.9%)
 +0.5% GNMA Funds (YTD +7.3%)
 +0.5% Short Investment-Grade Funds (YTD +3.2%)
 +0.6% High Yield Municipal Funds (YTD +3.7%)
 +0.7% U.S. Government Funds (YTD +8.3%)

Funds seeking high yield were the week's top performers.  High 
yield funds had an average weekly total return of 1.3%.  Fixed 
income funds that are of investment-grade quality overall, but 
have some high-yield exposure, such as The American Funds Bond 
Fund of America (ABNDX), sported big gains as well.  It gained 
1.3% for the week.

Global fixed income funds gained 1.3% on average, international 
income funds averaged 1.8%, and some emerging market debt funds 
did even better.  Fidelity New Markets Income (FNMIX), which we 
profiled last Tuesday in our Weekly Fund Screen segment, was up 
2.4% for the weekly period through Friday, November 1, 2002.  A 
portion of the high total returns put up by non-U.S. bond funds 
last week was currency related. 

Largest Mutual Funds

The largest equity funds in the country were generally higher, 
with only Fidelity Contrafund and Growth & Income funds lower.  
The group's two non-U.S. funds, American Funds New Perspective 
(AEPGX) and EuroPacific Growth (ANWPX) had the better relative 
 Largest Stock Funds:
 +0.4% Vanguard: 500 Index (VFINX) YTD -20.5%
 +0.1% Fidelity: Magellan (FMAGX) YTD -20.1% 
 +0.8% Investment Company of America (AIVSX) YTD -15.0%
 +0.5% Washington Mutual Investors (AWSHX) YTD -15.7%
 +0.7% Growth Fund of America (AGTHX) YTD -19.8%
 -1.4% Fidelity Contrafund (FCNTX) YTD -7.8%
 -0.9% Fidelity Growth & Income (FGRIX) YTD -16.1%
 +1.2% EuroPacific Growth (AEPGX) YTD -14.9%
 +1.1% New Perspective (ANWPX) YTD -16.7%
 +1.2% Vanguard Windsor II (VWNFX) YTD -16.3%
 Largest Bond Funds:
 +0.8% PIMCo Total Return (PTTRX) YTD +7.4%
 +0.4% Vanguard GNMA (VFIIX) YTD +8.2%
 +0.7% Vanguard Total Bond Market (VBMFX) YTD +5.8%
 +1.3% Bond Fund of America (ABNDX) YTD +0.8%
 +0.7% Vanguard Short-Term Corporate (VFSTX) YTD +3.4%
 Largest Balanced Funds:
 +1.0% Vanguard Wellington (VWELX) YTD -8.4%
 +0.8% Income Fund of America (AMECX) YTD -8.1%
 +1.0% Fidelity Puritan (FPURX) YTD -9.0%
 +1.3% American Balanced (ABALX) YTD -8.2%
 +0.7% Fidelity Asset Manager (FASMX) YTD -8.3%

The $39 billion PIMCO Total Return Fund produced a solid 0.8% 
weekly total return.  The American Funds Bond Fund of America 
(ABNDX) ended the week 1.3% higher, with its high yield stake 
adding value.  Safer funds, such as Vanguard GNMA Fund (VFIIX), 
had weekly gains of up to 0.5 percent.

The largest balanced funds outperformed the broad stock market, 
as measured by the S&P 500 index, led by the 1.3% weekly return 
from American Balanced Fund (ABALX).  The $6.0 billion Franklin 
Income Fund (FKINX) had a 2.9% weekly total return, beating its 
hybrid peers by a wide margin.

It was one of those weeks where it paid to be well diversified. 
Midcap, small-cap and international stock funds added value on 
the equity side, while it paid to reach for yield on the credit 
side.  It would appear in the last few weeks that investors are 
slowly taking more portfolio risk, and being rewarded for doing 

Money Market Funds

iMoneyNet's all-taxable money market fund average stood at 1.21% 
as of October 29, up a basis point from the week before.  PayPal 
MMF (1.78%) and Touchstone MMF (1.76%), the top yielding "prime" 
retail funds currently, were unchanged for the reporting period. 

Fidelity Cash Reserves and Vanguard Prime Money Market Fund, two 
low-expense bellwethers, sport current 7-day yields of 1.50% and 
1.48%, respectively, per iMoneyNet's latest report. 

Money market fund assets totaled $2.21 trillion as of Wednesday, 
October 30, 2002, according to the ICI's latest survey.  For the 
week, MMF assets declined by $18.4 billion (net) with most of it 
($14.8 billion) coming from the institutional side.  

Mutual Fund News

Per Morningstar's weekly Fund Times report, the AIM Funds is the 
latest fund family to say it is cutting jobs, some 120 positions 
or roughly five percent of the firm's workforce.  The reductions 
are in the form of voluntary and involuntary departures.  AIM is 
also planning to cut back on travel and advertising expense, the 
article mentioned.  AIM's assets have declined from $183 billion 
in March 2000 to $117 billion today.  

London-based AMVESCAP, which owns both the AIM Funds and Invesco 
Funds, also announced a corporate level realignment according to 
Morningstar.  In an effort to streamline its structure, AMVESCAP 
plans to consolidate its five divisions into its AIM and Invesco 
units.  The move involves senior level management changes, so if 
you are a shareholder of one of the five AMVESCAP units, you may 
wish to talk to fund representative to find out more information.

MFS Capital Opportunities Fund (MCOFX) has replaced current fund 
manager Maura Shaughnessey, in other Morningstar news, assigning 
co-management responsibilities to Kenneth Enright (MFS Strategic 
Value Fund) and S. Irfan Ali (MFS Strategic Growth Fund).  Maura 
Shaughnessey ran the fund for four years, producing results that 
lagged her large-blend peers.  

The Morgan Stanley Funds plans to offer a sector rotation fund, 
according to SEC filings, and as reported by Morningstar.  This 
proposed fund, named Morgan Stanley Allocator Fund, will have a 
"top-down" investing approach that first looks at trends in the 
market and economy, and next selects asset classes, sectors and 
industries they believe can benefit from those trends.  Expense 
ratio information was not available.
That's it for this week's Weekly Fund Wrap.  Have a great week.  

Steve Wagner
Editor, Mutual Investor 


Today’s Menu: Open Interest, Option Volume & Taking Profits
By Mike Parnos, Investing With Attitude

The restaurant ad read: Dinner Special -- Turkey $2.35; Chicken 
or Beef $2.25; Children $2.00.  The Couch Potato Trading 
Institute menu for today includes a look at some concepts that 
need a bit of review for some students and new for others.  Dig 
in.  Tasty morsels to follow.

In past columns we’ve discussed how open interest can often 
provide a guideline to support and resistance levels.  It can 
also suggest the strike price close to which the market makers 
would like the stock to finish.

It can be a little confusing, though.  Sometimes, when there is 
news on a stock, there is an unusual amount of volume on a 
particular option. The question -- How can the daily volume of an 
option be greater than the open interest? – leaves some newer 
traders scratching their head?  Regardless where they scratch, or 
why, we’re going to address the question anyway.

When you read an open interest figure, it represents the total 
number of outstanding contracts of a particular option at the end 
of the previous trading day.  For instance:  XYZ company’s 
December $45 call has open interest of 810 contracts.  
Essentially, that means that traders have either “bought to open” 
or “sold to open” a total of 810 contracts during the life of the 
December $45 call option – and the positions are still “open.”

Assume some news came out on XYZ and a volume of 1250 contracts 
were traded on Thursday.  The daily option volume is just that – 
the number of options traded that day.  They could have been 
options “bought to open,” “bought to close,” “sold to open,” or 
“sold to close.” 

Open interest is calculated at the end of every trading day.  On 
Thursday, every time a contract was “bought or sold – to close,” 
that contract was deducted from the 810 open interest number.  By 
the same token, every contract that was “bought or sold – to 
open,” will be added to the 810 figure.

If, out of the 1250 contracts that were traded on Thursday, 500 
were to “close” and 750 were to “open,” here’s how the new open 
interest figure would be calculated.

Wednesday’s Open Interest:  	810 Contracts
Thursday “to close”:	    (500) Contracts
		Sub Total:		310 Contracts

Thursday “to open”:		750 Contracts
		Total		    1,060 Contracts = New Open Interest

When an option is first opened, the volume will almost always 
exceed the open interest, because it started at zero.  If you 
watch the relationship between open interest and daily volume, it 
can indicate what kind of trading took place that day.

Option Volume
Stocks have an average number of contracts that trade during the 
course of a day.  This is the sum of all the puts and calls at 
all available strikes.  Maybe one day the total will be 1,500, 
1,800 the next day, then 1,200 the day after that.  The average 
is about 1,500 contracts.

Occasionally, there will be an unusual number of contracts traded 
for a day, maybe two, unaccompanied by any news that would 
justify that amount of activity.  AHA!!  Something is likely 
going on, but we don’t know what it is.  An impending merger?  An 
earnings warning?  An analyst downgrade?  An early FDC ruling?  
Maybe a pre-earthquake sale?  

Maybe it’s just a fluke, but often there’s “something rotten in 
Denmark.”  We don’t know what’s going to happen – but SOMEBODY 
DOES!!  And those sneaky bastards are going to take advantage of 
it.  As we curse them under our breath, many of us secretly wish 
we were “in the know” so we could, just once, be one of the 
sneaky bastards and make a quick killing on an unsuspected move 
in a stock.  Although it’s not foolproof, it’s right enough times 
to be considered by many a “leading indicator.” The tip-off is 
the unusual (much higher than average) volume of options traded.  

It’s a type of insider trading.  These happenings go largely 
undetected by the SEC.  As you know, insider trading is how 
Martha Steward got her _____ in hot water (with two tbsp. of 
salt).  If Martha was a sharp chocolate chip cookie, instead of 
selling her shares of IMCL, she could have just bought more puts 
than the amount of stock she owned.  Then, her shares would have 
been covered and she would have realized substantial extra 
profits on the additional puts she bought.  It’s not foolproof, 
but, if scrutinized, she was just buying protective puts plus a 
few more for good measure.

But now, Martha’s lost a lot of her cookie dough.  People will 
still buy her products at Kmart, but the SEC isn’t buying her 
story at all.

Getting In and Out – Without Missing A Beat
All this time you thought it was tough getting into a new 
position.  Well, I’m here to tell you that sometimes it’s a lot 
tougher getting out.  Of course we’re talking about trading here, 
but it does apply to other aspects of life.

It’s often the source of confusion.  You initiate a trade. It 
immediately goes in your favor.  It’s exciting.  You did 
something right for a change.  You get that invincible feeling.  
You ask yourself, “Should I take my profits now?”  A little voice 
says, “No way! I’m going to suck every nickel I can out of this 
trade.”  Needless to say (but I will anyway), the quickest way to 
lose your profits is to stay in the trade too long.

Taking Profits on a Debit Spread
A question arose recently when a friend of mine had a bear put 
spread on the QQQs.  He had picked a direction (down), purchased 
the QQQ $26 puts, and sold the QQQ $22 puts two months out for a 
debit of $1.30.  His maximum profit from the trade was $4.00 less 

his debit of $1.30, or a total of $2.70.  Even if Moses came down 
the mountain with an 11th commandment saying my friend was 
entitled to more profit, his maximum was still going to be $2.70.  
As we know, Moses would have been no match for your friendly 
neighborhood market maker.  Market makers take crap from nobody, 
much less an old guy wearing sandals and carrying two tablets 
(that weren’t Tylenol) that gave him some rules to live by.

In the QQQ trade above, the market tanked and within a week the 
QQQs were already trading through the spread below $21.   At that 
point, the position could have been closed for a credit of $3.10.   
Remember, the initial debit on the spread was $1.30.  So, the 
profit, if the trade was closed, would have been $1.80.  That’s 
2/3 of the maximum potential profit on the trade. Pretty good for 
a week’s work.

BUT – is $1.80 enough?  There’s an extra $.90 to be had if the 
QQQs, seven weeks from now, finish below the original sold strike 
of $22.  Is it worth risking a profit of $1.80 in the hand for 
the other $.90 in the bush?

Once both the $26 and $22 strikes of the spread are in the money, 
the time value is eroding very slowly.  Time is no longer working 
for you.  Your risk reward is now upside down.  You’d be risking 
$1.80 to make $.90.

Here’s what my friend was faced with.  If the stock reverses, the 
high delta will make the profits disappear in a big hurry.  If 
the QQQs continue down, he might realize another $.10 or $.15. He 
could let it run and use very tight stops or simply close the 

As it turns out, he won the CPTI’s “Spud” award.  He set aside 
his emotions, closed the spread and pocketed the profit.  

Happy trading!  Remember the CPTI credo:  May our remote 
batteries and self-discipline last forever, but mierde happens.  
Be prepared!  In trading, as in life, it’s not the cards we’re 
dealt.  It’s how we play them.
Your questions and comments are always welcome.  


New Perspective On Bullish Percent Charts
by Mark Phillips

Pride, along with other frail human emotions, motivates us to
constantly search for the newest trick of the trade (all puns
intended), first so that we can increase our trading profits,
but additionally so that we have bragging rights when we are
proved right.  I learned a long time ago that there are many
people in this game that have far more insight as to the way the
market works than I do.  Sure, I've managed to stumble onto some
original (I think) trading ideas, but for the most part, I am
content to use what others before me have discovered.

Jeff Bailey has done us all a great service in his time here at
the newsletter, expounding on the benefits of Point & Figure
(PnF) charting, along with the use of the Bullish Percent (BP)
readings on the major indices.  Before meeting Jeff, I was
blissfully ignorant of this great trading tool, but over the
years I have come to appreciate just how valuable it is, if
properly applied.  Suffice to say, I never make a trade without
at least having an understanding of what the PnF chart and the
sector/index BP charts are revealing about supply and demand.
The result is that I always have a better understanding of the
risk and reward in every trade I make.

That said, I'm always looking for a way to tweak all of the tools
at my disposal, whether it is through changing their basic
application, or combining 2 or more indicators in a way I have
never thought of before.  While I would love to take credit for
the idea I'm going to share with you tonight, I can't.  Like most
of the interesting ideas I stumble across, this one came from one
of our many astute readers that has taken a fresh look at the use
of the BP charts.  I don't know about you, but prior to this idea
being presented to me, I never even thought to look at the BP
charts in any way other than in a PnF format.

Let's start from the beginning, with an excerpt from the email
I received last week from a reader, B.R.

Jeff Bailey seems to have gotten most of you guys at OIN on the
bullish percent bandwagon.  I've been following it too.  I've
noticed that using a bar chart (StockCharts calls them Sharp
charts) and a 10 day moving average for the bullish percent data
rather than the traditional point and figure Xs and Ox seems to
give a nice entry point when the "price" crosses the moving

Now doesn't that sound interesting?  It did to me too, and I had
to rush right on over to StockCharts.com to check it out for
myself.  Since I know not everyone is as familiar as I am with
the StockCharts.com site, I've gone in and created the basic
framework for the setup that BR recommends.  Just click on the
link below, and it should bring up the SharpCharts portion of
the StockCharts site, so that everyone can follow along together.
I've set the chart to display the Bullish Percent chart of the
OEX for our discussion here today.

SharpChart of OEX Bullish Percent

For those of you that would rather just look at the charts I've
prepared tonight, here is the annotated OEX Bullish Percent chart
with Buy and Sell signals shown where the Bullish Percent crossed
over the 10-dma.

Sharp Chart of OEX Bullish Percent

While I recognize that this is a fairly short timeframe to be
looking at, isn't it interesting that each time the BP line
(red) crossed through the 10-dma of the Bullish Percent (blue),
it made for a solid directional trade that actually had some
staying power?  Here's how it would have shaken out.  Buy puts
in late May, with the OEX trading near 530, and then close that
position and buy calls in late July with the OEX trading near
430.  That long trade only lasted for about a month, but it was
good enough to ride the OEX up near 485 before running out of
gas.  That round trip was certainly enough to allow us to capture
100 OEX points to the downside and then an additional 50 points
on the upside -- all in the space of 4 months on a Buy and Hold
strategy in the most volatile market conditions that I have ever

Switching back to puts in late August gave us a 100 point ride
to the downside and then back to calls roughly 3 weeks ago for
another 60 or so points to the upside -- so far.  It seems like
taking candy from a baby!  As I have pointed out numerous times
in the past, we can't use any indicator in a vacuum, and need to
have confirming signals that we know and trust.  So what does our
standard price chart of the OEX have to say when we add in our
trusty Stochastics oscillator?  I'm glad you asked!

OEX Weekly Price Chart

Look at the timing of the Buy and Sell signals generated by the
Stochastics on the weekly chart and compare back to the BP chart
above.  The signals came at virtually the same time.  Do you
think maybe there's some value in adding the BP chart with its
10-dma to our watch list when trying to divine the future of
the market?  I do!  For advanced students, go back and look at
the OEX chart relative to the VIX over the past several months.
Those extremes in the VIX gave an earlier entry signal, but it
didn't take long for this BP indicator (along with the weekly
Stochastics) to give a strong confirmation that we were on the
right side of the trade.  

Now please understand, I haven't done any more back-testing of
this indicator than what we've walked through here tonight.  I'm
going to be watching the behavior of this BP chart and its 10-dma
over the next couple cycles from overbought to oversold, trying
to ascertain whether this is a repeatable pattern or just a fluke.
I've looked at all the major indices and can see the same pattern
over the past 6 months, but that is really a narrow window of
time.  I want to see if it performs in a similar fashion over the
next 6 months.  If it does, you can bet, I'll have another tool
that I can add to my arsenal.

Remember, what we're looking for in the BP charts are cycles from
Overbought to Oversold.  Using the standard Bull Confirmed, Bear
Alert, Bear Confirmed, Bull Alert nomenclature is still the
primary method in which I expect I will use the BP charts.  But
when I'm trying to get a clue as to whether the BP chart is just
pausing in its current trend, I think using this different format
could just give me an edge against the market.  And with the
markets behaving as irrationally as they have been lately, I need
every edge I can get.  Thanks for the great tool, BR!

I hope the rest of you found this idea as interesting as I did!


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Bulls going long this morning on the Microsoft news got 
blindsided by the reality truck. It appears the bounce 
convinced shorts to cover but did not convince bulls to 
fight the facts that could come out later in the week.

To read the rest of the Swing Trader Game Plan Click here:

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The Option Investor Newsletter                   Wednesday 11-04-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

Stop Loss Updates: FCS, FRX, TRMS, LOW, RTH
Dropped Calls: none
Dropped Puts: NTRS
Play of the Day: Put - RTH

Updated on the site tonight:
Market Watch
Market Posture

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Stop-Loss Adjustments

FCS - call
Adjust from $10.25 up to $12.00

FRX - call
Adjust from $95 up to $96.50

TRMS - call
Adjust from $50 up to $52.50

LOW - put
Adjust from $45 down to $44

RTH - put
Adjust from $80 down to $78





NTRS $37.46 +1.83 (+1.83) Monday's broad market rally was led
by a couple bullish favorites, Techs and Financials, with the
Banking index (BKX.X) showing a 2.4% gain before the rally faded
in the afternoon session.  At its high, NTRS moved up above $38
following the opening move through our $37 stop.  Despite the
fact that the BKX index fell back to close in the red, NTRS
actually held onto the bulk of its gains, ending up more than 5%.
Given this relative strength and our violated stop, the play is
obviously a drop tonight.  Open plays should have been stopped
out at the open this morning, but for those still holding on,
take any early weakness tomorrow as a gift of an exit point.

_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_.

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and clicking on the link to the book on its home page.



RTH - Retail HOLDR - $73.35 -2.08 (-2.08 this week)

Company Summary:
Retail HOLDRS are Depositary Receipts issued by the Retail HOLDRS
Trust which represent your undivided beneficial ownership in the
common stock of a group of specified companies that are involved
in the retailing industry. The Bank of New York is the trustee.
Retail HOLDRS may be acquired, held or transferred in a round-lot
amount of 100 Retail HOLDRS or round-lot multiples. Retail HOLDRS
are separate from the underlying deposited common stocks that are
represented by the Retail HOLDRS. The Retail HOLDRS Trust is not
a registered investment company under the Investment Company Act
of 1940. (source: AMEX)

The retailers got additional bad news this morning, with the
release of a host of economic data.  There were lower than
expected numbers in payrolls, personal income, personal spending,
average workweek, and auto and truck sales.  While this data may
have driven the market higher temporarily, in anticipation of a
rate cut next week, it is certainly negative for the economy.
Heading into the holiday shopping season, retailers do not want
to see a drops in personal spending, and personal income growing
at a less than expected 0.4%.  The RTH started the day negative,
and surfed the rising tide higher in the afternoon.  However,
even with the bounce, it came nowhere close to the 50-dma of
$76.89.   While a rate cut may eventually help the economy after
it makes its way through the system six to nine months from now,
it will not put many dollars in shoppers pockets in the next 2
months.  We have been hearing many specialty retailers complain
that mall traffic is weak and now even grocery chain Albertson's
has predicted a decline in same store sales for the third
quarter.  It was reduced from a "reduce" to a "sell" by UBS
Warburg, after reducing earnings expectations, citing competition
from Wal-Mart, which itself was recently downgraded and removed
from Goldman Sachs recommended list.  We are expecting holiday
sales to continue the trend of missed expectations, and this
morning's data only reinforced that sentiment.   New entries in
RTH can watch for a failed rebound at the 50-dma if the broad
market rally continues Monday in anticipation of a rate cut on
Wednesday.  If the market gives back today's rally, then look for
a break back below $75.  We will use the PnF bullish support line
of $67 for our initial target on the play.

Why This is our Play of the Day

The negative news flow in the Retail sector hasn't changed one
bit, and today's first serving of gloom came from Goldman Sachs
before the open, with the firm citing "daunting" near-term
comparisons for LOW and HD and few organic growth opportunities.
This was followed by Prudential lowering their rating on KSS to
Hold, based on valuation.  Despite the broad market rally today,
the Retail index (RLX.X) never really found a bid.  When the
broad market rolled over this afternoon, the RLX led the decline,
ending with a more than 2% loss on the day.  The RTH HOLDR slid
2.75%, and more importantly ended the day below last Friday's
intraday low.  If the bearish pressure continues tomorrow morning,
new positions can be considered on a break below $73.
Alternatively, we can look to enter on the next failed rally near
$75.50, the site of Monday's intraday resistance.  With the
continuing trend of lower highs and lower lows, it seems safe to
lower our stop to $78.

*** November contracts expire in 2 weeks ***

BUY PUT NOV-75 RTH-WO OI=2306 at $3.00 SL=1.50
BUY PUT DEC-75*RTH-XO OI= 170 at $4.60 SL=2.75
BUY PUT DEC-70 RTH-XN OI= 272 at $2.55 SL=1.25

Average Daily Volume = 666 K

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Breaking Out

To Read The Rest of The OptionInvestor.com Market Watch Click Here


Ready for a Breakdown

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