Option Investor

Daily Newsletter, Monday, 11/11/2002

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

In Section One:

Wrap: Between the Lines
Futures Wrap: Shooting Star
Index Trader Wrap: Saying one thing, but doing another
Weekly Fund Wrap: Rate Cut Sends Bonds Higher, Weakens Dollar
Traders Corner: And Now For Something Completely Different

Updated on the site tonight:
Swing Trader Game Plan: Iraqnaphobia

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
11-11-2002                High    Low     Volume Advance/Decl
DJIA     8358.95 - 178.18 8535.88 8349.53  1310 mln   163/1130
NASDAQ   1319.19 -  40.09 1355.10 1319.07  1260 mln   125/1126
S&P 100   447.63 -   9.76  457.39  446.77   totals    288/2256
S&P 500   876.19 -  18.55  894.74  874.63
RUS 2000  369.14 -   9.86  379.00  369.14
DJ TRANS 2271.47 -  75.41 2353.58  2268.22
VIX        36.11 +   2.55   36.21  35.06
VIXN       55.71 +   3.70   56.93  52.47
Put/Call Ratio .78

Between the Lines
by Steven Price

It's tough to draw any conclusions on a light volume day, when 
the bond markets were closed for Veterans' Day, but there were 
several significant developments. We saw previous 
support/resistance levels fall and it appears we are back into 
our previous range in the broader indices.   Interestingly, we 
may also be forming another pattern similar to the one we saw 
earlier this year, but at a lower level.  

On Friday, the possibility of war with Iraq helped start the 
markets rolling down hill.  The U.S. proposal on weapons 
inspections was approved and the Iraqi ambassador responded that 
it was simply the will of the U.S. and was crafted in such a way 
as to prevent inspectors from entering the country.  That 
rhetoric continued today, as the Iraqi parliament took up 
consideration of the U.N. proposal.  The opening speaker 
expressed the opinion that the proposal be rejected, indicating 
that we may be skipping inspections and heading to war sooner, 
rather than later. 

One interesting non-development the last couple of days has been 
the price of oil.  While there has been quite a bit of saber 
rattling, oil futures have increased only slightly. They are 
nowhere near levels from earlier this fall, when war with Iraq 
seemed even further off.  Even then, most pundits predicted we 
wouldn't be able to enter the country until winter, simply due to 
the extreme heat.  However, now that we are getting closer, with 
Iraq apparently ready to reject the U.N inspections proposal, oil 
is hanging down around $26 per barrel.  Oil futures traded almost 
$31 per barrel a month ago, but have dropped as OPEC member 
countries have overproduced by about 15% over stated quotas for 
the last few months.  This bodes well for our economy, as it is 
apparent that where there is potential profit, supply will 
follow.  And since an increase in oil prices makes its way to 
almost every product in the U.S., an increase in fuel cost is the 
quickest way to put the pinch on our economy.  While Iraq 
certainly produces a significant percentage of the Middle East's 
oil supply, it is apparent that "quotas" will not restrict supply 
as much as we have been led to believe, if prices start to rise 
again.   War in the Middle East will certainly lead to some 
increase in price, as Iraqi production is restricted, and 
transportation in the region may see interruptions, however it 
may not be as bad as we thought.   A look at the December futures 
shows a slight increase the last three days, since the U.N. began 
contemplating the U.S. proposal.  While we may not see a huge 
price increase, it is apparent that oil prices have stopped 

Chart of Crude Oil Futures

The Dow, S&P 500, and OEX all formed classic head and shoulders 
formations from July through September.  When those patterns 
concluded themselves with a neckline breakdown in the middle of 
September, the downside measuring objectives were achieved in 
less than a month. Once we achieved those levels, we skyrocketed 
up almost as quickly as we fell.  Both moves seemed extreme and 
certainly the business environment has not changed so 
dramatically for the worse and then so dramatically for the 
better in less than three months. However, as illogical as these 
moves may seem, the patterns have been reliable. We now have 
begun to form what looks like a possible repeat of the summer-
fall head and shoulders.  The pattern is only two thirds complete 
and could certainly turn out to be something completely 
different, but as we observe the market from this point forward, 
we should look out for history repeating itself.  Since the 
patterns are similar on all three, I'll post only the Dow chart 
for illustration. 

Chart of the Dow

After the recent rollover, the Dow is also back in familiar 
territory.  The 8200-8550 range has contained the average several 
times recently, and now that we are right in the middle, my guess 
is that we will test at least that lower end (8200) before the 
next move out of the channel. Of course, moving almost 200 points 
at a crack, that advice may not be good past Tuesday. Which 
brings me to another point.  Picking levels in the current 
environment does not have the same impact as it did just a couple 
of years ago.  We seem to move in triple digit jumps almost 
daily.  I had to go back to September 20 to find a day in which 
the Dow did not trade in at least a 100-point range intraday and 
even then it was 95 points. So we need to be aware of these 
levels and be very nimble, attempting to trade the top of the 
range short and then the bottom long.  The move may only last a 
day or two, (or even happen intraday) before reaching the next 
support/resistance level and reversing itself.

Chart of the Dow Range

We are also seeing a major tech pullback, now that the Nasdaq 
achieved its August highs.  The pattern is not the same as the 
Dow, but certainly the rejection is similar.   It appears that 
the August high around 1425 in the COMP will be our gauge for 
whether the tech bear market can break out of its slump.  While a 
break above that level certainly does not indicate we will return 
to 5000 in the Nasdaq, a repeated failure there may indicate that 
the downside still has plenty of room.   The logical bounce point 
on the last pullback would have been 1360, after filling the gap 
from last Monday.  However, that held for only a day, on Friday, 
before today's action took us lower. A re-test of 1300 now 
appears likely. 

Chart of the Nasdaq

One of the groups that helped the Nasdaq to its recent highs, but 
has now rolled over dramatically, is the chip sector. Led by a 
downgrade to Taiwan Semiconductor (TSM), the Semiconductor Sector 
Index (SOX.X) gave up 5.7%, dropping 16.79 to 283.12.  After 
gaining more than 50% in a month, the pullback is beginning to 
look like more of a major breakdown.  AMAT's earnings report on 
Wednesday should have a pronounced effect on the sector, although 
it is hard to imagine anything good coming out of the 
announcement, since the company already announced it was cutting 
jobs to combat the two year chip slump. In addition, the 
Semiconductor Industry Association (SIA) said that global chip 
sales are expected to grow 8-10% in coming years, compared to 
annual rates of 16% in the past.  That 50% reduction, on the low 
end, was not totally unexpected, but seemed to leave investors 
wondering why the sector had exploded in value recently. AMD 
chairman, who also sits on the SIA board, said," We can no longer 
count on the proverbial rising tide that lifts all boats."   The 
group also cut its global sales forecasts again for 2002, saying 
it expects growth of only 1.8%; a drop from the 3.1% mid year 
forecast. SIA also reduced its forecast for 2003 from 23.2% to 
19.8% and raised 2004 estimates from 20.9% to 21.7%.

Chart of the SOX

Single stock futures (SSF) began trading on Friday, and although 
there has not been much volume to this point, they may actually 
provide more options liquidity.  Right now, market makers with 
short stock positions are held back from filling large in-the-
money call orders on the buy side, or large in the money put 
orders on the sell side, as getting off a short hedge requires an 
uptick in the stock.  A stock that may be pulling back only drops 
further when a specialist on the NYSE sees a large number of 
short sellers enter the picture.  Therefore, there are option 
orders that go unfilled, as market makers are not willing to take 
on the added risk of trying to sell short.  However, without a 
similar rule in the futures, short selling is no longer a 
problem.  If the SSF market can draw enough futures market 
makers, there may be enough liquidity for options traders to 
increase the size of their bids and offers, since they will have 
an easier time hedging their trades.   

With the bond markets back open tomorrow, we should see heavier 
trading and get a better feel for direction.  However, now that 
we are in the center of the current Dow range, there are only 150 
points to the downside before testing support. In the Nasdaq, 
there are only 19 more downside points before the next test. 
Right now the prevailing trend is down, so until something 
changes, that is the way I'll play.  However, as I said earlier, 
given the current wide intraday trading ranges, I won't hesitate 
to close positions and play a bounce as soon as we get one at the 
above mentioned support levels. That seems to be the best 
strategy until we cross another line, at which point we have a 
new range to bounce within.   While this makes long term 
direction tough, we can only trade what the market gives us, and 
right now trading inside the lines seems to be our best 


Shooting Star 
By John Seckinger

The potential weekly “Bearish Shooting Star” formation was 
confirmed on Monday, as the Dow closed underneath last week’s low 
of 8498.  

Monday, November 11th at 4:00 P.M. 

Contract          Net Change     High        Low        Volume    

ES02Z     875.50     –18.00     890.00      873.00     407,155
YM02Z    8359.00    -136.00    8501.00     8326.00      11,767
NQ02Z     976.00     -33.00     1007.00     973.50     183,964

ES02Z  =  E-mini SP500 futures    
YM02Z  =  E-mini Dow $5 futures    
NQ02Z  =  E-mini NDX 100 futures     

Note:  The 02Z suffix stands for 2002, December, and will change 
as the exchanges shift the contract month.  The contract months 
are March, June, September, and December.  The volume stats are 
from Q-charts.  

Disclaimers:  Volume was light on Monday, and there were neither 
notable economic report nor economic earnings to report.  It 
should also be noted that the Bond market was closed due to 
Veteran’s Day Holiday.  

Making Headlines:  Iraq is nearing its deadline to comply with UN 
resolution, affecting oil prices.  Also, ORCL, IFX, and TSM were 

Tuesday’s Potential Catalyst(s):  Bond market, especially Dec 30-
year, which is at 112’31 and has resistance at 113’29 and support 
at 112.  Note:  If bond prices rally, stocks should go lower.  
Other catalysts include the XAU and Utility Index.  The XAU fell 
on Monday to 67.68 while the 200, 50, and 22 DMA’s all converge 
(67.09, 66.64, and 66.17, respectively).  Things should get 
volatile if the XAU falls on Tuesday.  Note:  XAU should trade 
inversely with dollar.  The Utility index (UTY) found some 
retracement support at 236 (low at 233, closed at 236) but is 
under its 22 DMA (242) and looks to fall further.  Support is at 

Tuesday’s Economic and Earnings Calendar:  There are no economic 
reports to be released on Tuesday.  As far as earnings are 
concerned; some notable names include JCP and NEW both before the 
open, while ANF, NTAP, and SCMR are scheduled after the close.  


Long-term bearish views came to fruition on Monday, as the Dow 
fell underneath last week’s low of 8498 and closed under 8400 at 
8358.  The intermediate pivot to the upside looks to be the 22 
Weekly Moving Average at 8576.  The intermediate objective to the 
downside is at 8187 for the Dow, which should correlate to 8169 
for the YM02Z contract.  

Chart of Dow Jones, Weekly 

Looking at the ADX Oscillator, since the ADX weakened from above 
40 and moved below 40, it is a sign that the current trend is 
losing strength and a trading range could develop.  If we are in 
a trading range, where is the floor?  I will let the market tell 
me.  Thoughts for a floor could be the high during the week of 
October 13th at 8331.  Would a bounce nullify the bearish shooting 
star formation?  No.  Only a close above 8800 will do that.  
Note: The descending trend line (red) comes in at 8104 and under 
the 38.2% retracement level.  

Notice how the weekly chart is forming a “b” formation.  This 
signals long-liquidation, and recent action should have the 
market coming back to the “high volume area,” or major pivot 
spot.  This area, not drawn, is at 8000.  With that said, long 
term traders can look for first 8187 and 8000 in the Dow with the 
22 WMA as a level for stops.  

Chart of YM02Z, 30-minute

Based on Friday’s potential play scenario (short at 8475), stops 
should be placed at 8415 to protect profits and wait to see if 
the bottom of the regression line will be tested (currently near 
8500). If the market continues to fall, another potential play 
would be to go SHORT YM02Z at 8285 with a target of 8169.  Stop 
would be placed at 8330.  If the Dow rises above the 8415 pivotal 
level, there appears to be too much risk taking a long position.  
The 22 DMA is at 8441, while more resistance is at 8480.  I am 
looking for a “clear” move between 50-100 points, and not sure 
above 8415 makes it an obvious choice to go long.  A close above 
8525 could, but if that happens it will be covered in Tuesday 
night’s wrap. 

Turning to the E-mini SP500 futures contract, there is a clean 
break of the daily regression line, the 22 and 50 DMA’s, and 
Monday’s weakness had the index settling at its lowest close 
since October 16th.  If Friday’s potential play was followed and 
the contract was shorted under 890.50 (with stop trailing down to 
886 once 881 was tested), it makes sense to move stop down to 

Am I worried about the market coming back to 895 and testing the 
bottom of this channel?  Yes.  However, least resistance is still 
lower and there is still some room to the next support level at 
869.  Support under 869 is found at 854.50 and 841.50 (most 
important for longer term traders).  

Chart of ES02Z, Daily 

Taking the regression channel to a 5-minute chart, a pivot can be 
seen at 881 and above 885, where longs were trapped as the market 
made it “seem” like shorts were about to cover.  Since prices 
will most likely trade just outside the regression line and test 
the pivot before continuing its downward trend (making traders 
think that ‘more volume equals higher prices’), a potential play 
would be to SHORT ES02Z at 881 with 869.25 as target.  Stop at 
886.  If the market gaps above 881 and is trading near 886 within 
the first few minutes of trading, another potential trade would 
be to SHORT the ES02Z contract at 890 and use a stop at 895.  
Target would be at 881.  

Chart of ES02Z, 5-minute

Looking at a daily chart of the NQ02Z, the pattern of closing 
underneath a highly watched regression line continues.  Support 
was found at 973.50 (low on November 1st), and a potential short 
would be to wait until this level is cleared.  With that said, 
look to SHORT the NQ02Z contract at 972 with a target of 961.  
Stop at 980, since that will make it clear that the selling is 
only trapping bears.   

Chart of NQ02Z, 60-minute

With the possibility that the Nasdaq 100 will outperform other 
indices in the event of bids coming into the marketplace, another 
potential play is to go LONG NQ02Z at 985 (above the highs on 
both July 30th and September 30th) with the target to test the 
bottom of the regression channel (995).  Use 974.50 as a stop 
level, since this should make it clear the market has failed and 
will most likely re-enter the drawn regression channel (see five-
minute chart).  

Chart of NQ02Z, 5-minute 

Good Luck.

Questions are welcomed,

John Seckinger


Saying one thing, but doing another

Stocks fell for a third-straight session as bull appear to be 
jittery on "war fears" after President Bush issued a Veterans Day 
warning to Iraq's President Saddam Hussein to comply with U.N. 
Security Council's weapons inspection resolution by Friday's 

While stocks were under selling pressure in the early going, 
lunch-hour news out of Iraq's parliament saying many of the U.N. 
demands "cannot be met," sent stocks firmly lower.  

While many broader market bulls have been saying that a potential 
U.S. lead war effort against Iraq has been baked into the 
proverbial "cake" known as the equity market, today's action 
hinted that bulls with profits at risk weren't necessarily 
willing to leave the "profit ingredient" in a cake that has 
recently started fall after bullish rise of 19% in the past 

Volume was light today as the bond market and many banking 
institutions took the day off in observance of Veterans Day.  
Volume on the NYSE just barely breached the 1 billion mark by 
session's end, while NASDAQ volume was equally light at just over 
1.2 billion shares traded.

Breadth was decidedly weak with decliners outnumbering advancers 
by a 2.5 to 1 margin, while NASDAQ breadth was anemic at 3 to 1.

Despite a more bearish tone, NYSE bulls were able to push 17 
stocks to new 52-week highs versus 52 stocks hitting new lows on 
the big board, while NASDAQ had 29 stocks pressing new 52-week 
highs versus 48 stocks achieving new lows.

Sector action was red across the board with the recent euphoric 
rise in the Fiber Optic Index (FOP.X) 36.57 falling back below 
40.00 with a 9.18% loss, while the CBOE Internet Index (INX.X) 
74.93 eased back 7% after a 60% from its October lows.

Relative strength performers on the day had the Dow Jones US Home 
Construction Index (DJUSHB) 289.24 -0.43% , Oil Index (OIX.X) 
251.57 -0.85%, HMO Index (HMO.X) 507.62 -0.88% along with the S&P 
Banks Index (BIX.X) 272.41 -0.85% showing more marginal losses.

Commodities that one might look for some upside on "war fears" 
had December Light,Sweet Crude (cl02z) $25.94 +0.62% trading up 
16 cents, while December Gold (gc02z) $321.60 fell 10 cents.

While we do not cover both the defense sectors in our weekend 
wraps due to space limitations, both the DFI.X 522.19 -3.05% and 
DFX.X 158.39 -2.54% saw little benefit from President Bush's 
saber rattling.

Dow Industrials Chart - Daily Interval

Shares of Hewlett-Packard (HPQ) $14.85 -10.97% never did attempt 
an intra-day recovery after their gap lower at $16.00 after the 
announcement that its president and former CEO of Compaq, Michael 
Capellas was stepping down to pursue other interests.  In August, 
investors shunned the stock as analysts became concerned that the 
year-old merger with Compaq was experiencing some difficulty.  
Today's resignation by Mr. Capellas rekindled some of those 

There was no net change to the very narrow Dow Industrials 
Bullish % ($BPINDU) after today's action.  Still "bull confirmed" 
at 63.33% and would take a reading of 56% to see a reversal to 
"bull correction" status.  

S&P 500 Index Chart - Daily Interval

The SPX did hover around its 21-day SMA for the first 90-minutes 
of trading, but when the 885 level was broken, the SPX pegged our 
61.8% retracement at 878.92 (actually it traded 878.85) rallied 
back to 885 then fell into the close.  Good news for the SPX 
today was that the recently battered HMO Index (HMO.X) 507.62 
-0.88% didn't get crushed again and may have kept the SPX from 
testing its 50-day SMA.  Bears holding November expiration puts 
may want to move to the sidelines here and not risk a bounce back 
near 900 with index expiration this Thursday.

Today's action saw the S&P 500 Bullish % ($BPSPX) fall 1% to 
54.4%, or see a net loss of 5 stocks to point and figure sell 
signals.  The relative high reading so far has been Wednesday's 
closing reading of 57.6% and this is the first time we've seen 
slippage of more than 3%.  Still "bull alert," but a reading of 
50% has the SPX bullish % reversing back to "bear confirmed" 
status.  Externals as depicted by the bar chart look bearish so 
bulls need to be more cautious and look for selling in Treasuries 
near-term to have the index firming up.

S&P 100 Index Chart - Daily Interval

S&P traders had a tough go today as they weren't able to follow 
the bond market action.  Bulls can play the OEX long tomorrow, if 
the bond market sees some selling before stocks open for trading.  
Remember, the bond market opens at 06:20 AM EST, which is 80-
minutes ahead of stocks.  This will give the bond market some 
time to adjust to any of today's equity action.  OEX bulls can be 
patient as the more "risky" 30-year YIELD fell below its 50-day 
SMA on Friday.  This had us thinking the indexes were at least 
vulnerable to their 50-day SMA's and that looks to be in play.

There was no net change to the S&P 100 Bullish 5 ($BPOEX) today 
and this group remains "bull confirmed" at 62% bullish.  Similar 
to the SPX, relative high for the OEX Bullish % was achieved on 
Wednesday at 63% bullish and would take a reading of 56% to have 
this market reversing lower into "bull correction" status.

NASDAQ-100 Index Chart - Daily Interval

NASDAQ futures were holding above the 1,000 level in pre-market, 
but not long after the open of trading the NASDAQ-100 Index 
(NDX.X) cut through the 1,000 level like a hot knife through 
butter and a race to test the 21-day SMA was on.  If still 
short/put from just before last weeks FOMC meeting and Cisco's 
earnings, or this morning's break of 1,000 watch your bonds in 
the morning.  If Treasuries are firm to lower in price (yield 
rising) then look to lock in gains on a dip at NDX 955 or QQQ 
$23.90.  I profiled and pulled the plug Friday in my QQQ bearish 
trade (also profiled in market monitor) when original target for 
FOMC and Cisco numbers was to a QQQ target of $24.25.  The Q's 
undercut that $24.25 target by 10 cents today.  Up ticks in the Q 
were hard to get this morning, but were there if you were lucky 
enough to place a short 5 cents below the bid.

I'd fully expect the NDX to find near-term support at the 953 
level as MSFT filled its 11/01-11/04 gap higher today.  Lots of 
shorts in MSFT that have gotten an education of what NOT to short 
in the Q's that will be looking to cover the next couple of days.

With "buttermilk" sectors (lumpy and end up at the bottom of a 
milk churn) like the Fiber Optic Index (FOP.X) 36.57 -9.18% 
losing roughly 19% of its value in the past three sessions, 
market makers will want to let a rally take place in that sector 
in order to get some up-ticks to short into.  If we start seeing 
the FOP.X, which has been one of the longer-term weak technology 
groups seeing some suspicious selling at the 40.00 level, then 
look for the NDX to do the same.

Today's action saw no net change in the NASDAQ-100 Bullish % 
($BPNDX) and current reading of 67% is just off Wednesday and 
Thursday's reading of 69%.  This is still "bull confirmed" status 
and would take a reading of 62% to reverse back lower into "bull 
correction" status.  Wednesday and Thursday's readings were close 
to the more "overbought" 70% level so bulls should be snugging up 
stops to protect gains.

Late afternoon negativity for technology and the Semiconductor 
Index (SOX.X) 283.12 -5.59% built to the downside after Merrill 
Lynch's Joe Osha said that his channel checks indicated that 
Intel (NASDAQ:INTC) $17.42 -4% would implement a series of price 
cuts later today on their high-end processors and that Intel 
(INTC) also intends to cut Celeron prices as well.

Jeff Bailey

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Rate Cut Sends Bonds Higher, Weakens Dollar

The U.S. Federal Reserve lowered short-term interest rates by a 
half-percentage point last week, from 1.75% to 1.25%, to spur a 
weak U.S. economy, driving bond prices up but taking the dollar 
lower.  A weak dollar and economic climate contributed to losses 
in U.S. stock markets, with the S&P 500 large-cap index off 0.6% 
and the S&P 400 mid-cap index down 2.1% for the week just ended.  
Small-cap stocks as measured by the Russell 2000 index lost 1.1% 
over the 5-day period. 


Foreign developed and emerging markets, meanwhile, finished the 
week higher in dollar-reported terms.  Europe rose by 1.2% last 
week while the Pacific stock index was 0.7% higher.  Vanguard's 
developed markets index fund had a 1.2% weekly return while its 
emerging-markets index fund captured a nifty 4.1% weekly return.

U.S. bond prices soared last week on the surprise 0.50% rate cut, 
with weekly gains growing as you moved out in effective maturity.  

Using Vanguard's index funds, the total bond market as measured 
by the Lehman Brothers Aggregate Bond index closed the week 0.9% 
higher, while the intermediate-term bond index rose 1.2% and the 
long-term sector gained 2.7%.  The short-term bond index rose by 
just 0.2%, lagging the other maturity sectors of the bond market.  
The high-yield sector enjoyed another solid week of gains.

Lipper's weekly fund indices reflect strong performances by gold 
funds (+4.8%), emerging-markets funds (+3.1%), and international 
funds (+1.1%).  On the flip side, weekly losses were produced by 
mid-cap growth funds (-1.8%) and mid-cap core funds (-1.5%), and 
small-cap core funds (-1.3%).  Not one U.S. equity fund category 
in fact closed the week higher, though most categories were down 
less than 1.0% for the weekly period.  Value funds overall did a 
better job of preserving capital than did growth funds. 

Six of Lipper's fixed income fund indices sported weekly returns 
of 1.0% or above, led by high yield funds (+1.7%), international 
income funds (+1.5%) and global income funds (+1.2%).  Corporate 
A-rated debt funds ended the week 1.1% higher, with intermediate 
investment-grade bond funds up 1.0% on average.  So overall, one 
of the better weeks for the bond markets and bond funds, earning 
equity-style returns.

Lipper Mutual Fund Indices

The top performing equity fund groups last week were gold funds 
and international funds as global investors sought alternatives 
to U.S. equities amid a floundering economy and slumping dollar.  
Balanced funds and science and technology funds were essentially 
flat, minimizing losses relative to other U.S. equity categories. 

 Top 5 Equity Indices:
 +4.8% Gold Funds (YTD +41.9%)
 +3.1% Emerging Markets Funds (YTD -5.6%)
 +1.1% International Funds (YTD -14.1%)
 -0.0% Balanced Funds (YTD -11.0%)
 -0.1% Science & Technology Funds (YTD -40.2%)
 Top 5 Fixed Income Indices:
 +1.7% High Current Yield Funds (YTD -6.8%)
 +1.5% International Income Funds (YTD +14.0%)
 +1.2% Global Income Funds (YTD +8.6%)
 +1.1% Corporate A-Rated Debt Funds (YTD +6.8%)
 +1.1% High Yield Municipal Funds (YTD +4.8%)
For the week, the average large-cap core fund lost 0.5%, while 
the average large-cap value fund slid 0.6%, mirroring the 0.6% 
decline by the broad stock market as measured by S&P 500 index.  
The average large-cap growth fund lost 1.0% on average, doing a 
little worse than the other two large-cap styles.

Fixed income funds produced equity-style returns last week, led 
higher by U.S. high yield funds, which returned 1.7% on average.  
A weaker dollar buoyed the total returns reported by global and 
international fixed income funds.  Since December 31, 2001, the 
average international bond fund has produced a 14% total return 
for investors.  

Largest Mutual Funds

The nation's largest mutual funds produced mixed results for the 
week ended Friday, November 8, 2002, with the largest U.S. stock 
funds slumping, the largest international stock funds generating 
solid gains, and the largest (taxable) bond funds broadly higher.
 Largest Stock Funds:
 -0.6% Vanguard: 500 Index (VFINX) YTD -21.0%
 -0.7% Fidelity: Magellan (FMAGX) YTD -21.7% 
 +0.1% Investment Company of America (AIVSX) YTD -14.9%
 -0.9% Washington Mutual Investors (AWSHX) YTD -16.4%
 -0.3% Growth Fund of America (AGTHX) YTD -20.1%
 -1.6% Fidelity Contrafund (FCNTX) YTD -9.3%
 -0.5% Fidelity Growth & Income (FGRIX) YTD -16.5%
 +1.0% EuroPacific Growth (AEPGX) YTD -14.1%
 +1.2% New Perspective (ANWPX) YTD -15.7%
 -1.0% Vanguard Windsor II (VWNFX) YTD -17.2%
 Largest Bond Funds:
 +0.8% PIMCo Total Return (PTTRX) YTD +8.3%
 +0.4% Vanguard GNMA (VFIIX) YTD +8.6%
 +0.9% Vanguard Total Bond Market (VBMFX) YTD +6.8%
 +1.3% Bond Fund of America (ABNDX) YTD +2.3%
 +0.4% Vanguard Short-Term Corporate (VFSTX) YTD +3.8%
 Largest Balanced Funds:
 +0.3% Vanguard Wellington (VWELX) YTD -8.1%
 +0.6% Income Fund of America (AMECX) YTD -7.6%
 -0.1% Fidelity Puritan (FPURX) YTD -9.1%
 +0.4% American Balanced (ABALX) YTD -7.9%
 +0.4% Fidelity Asset Manager (FASMX) YTD -8.0%

With the high-yield and international bond sectors doing well, 
funds like American Funds: Bond Fund of America returned more 
than 1.0% for the 5-day period.  Sibling, Bond Fund of America 
returned 0.6% last week, the best weekly return among balanced 
fund bellwethers.

Money Market Funds

iMoneyNet.com's all-taxable money market fund average was 1.21% 
as of Tuesday, November 5, 2002, no change from the prior week.  
However, with the 50 basis point cut in the Fed funds rate last 
week, you can expect money market fund yields to decline in the 
next few weeks as holdings mature and new paper is purchased at 
lower rates.

PayPal Money Market Fund remains the top yielding prime retail 
money market fund with a 7-day simple yield of 1.78%.  Next is 
Touchstone Money Market Fund with a 7-day simple yield of 1.73%.  

The $57.4 billion Fidelity Cash Reserves stands at 1.48%, while 
the $50.4 billion Vanguard Prime Money Market Fund has a simple 
yield of 1.47%, per iMoneyNet's website.

Money market fund assets totaled $2.25 trillion as of Wednesday, 
November 6, 2002, a $44.6 billion weekly net increase in assets.  
Virtually all of the net increase came from the "institutional" 
side, with retail money fund assets decreasing by $1.1 billion.

Mutual Fund News

The Investment Company Institute (www.ici.org) reports that the 
combined assets of the nation's mutual funds decreased by a net 
$329.2 billion, to $6.06 trillion, in September 2002.  That's a 
5.2% monthly decline in combined net assets of mutual funds.

The ICI survey, which incorporates mutual fund companies' actual 
assets, sales and redemptions, shows equity funds decreased $275 
billion or 9.9%, to $2.51 trillion in September.  Partial equity 
(hybrid) funds fell by $19.9 billion or 6.0%, to $305.5 billion.
Money market funds also experienced a net decrease in September. 

The only investment class increasing in combined asset value was 
the bond fund group.  Taxable and municipal bond funds increased 
by $25.4 billion or 2.4%, to $1.09 trillion, in September, using 
the ICI survey results.

The mutual fund industry's combined net assets have now declined 
in value by $916 billion or 13.1% since December 31, when assets 
of all mutual funds totaled nearly $7 trillion.

One by-product of industry consolidation is that some good stock 
funds may be reopened to new investors now that net asset values 
have shrunk.  For instance, the Morningstar 5-star rated Wasatch 
Small-Cap Value Fund (WMCVX), a small-cap blend fund will reopen 
this Wednesday, per Morningstar's weekly Fund Times report.  The 
fund now stands at a more manageable $403 million in assets.

In other news, reported by Morningstar, Fidelity announced last 
week that Bob Bertelson will step down as manager of the Fidelity 
Aggressive Growth Fund (FDEGX), following a period of poor return 
performance, both in absolute and relative terms.  For the 3-year 
period as of November 7, 2002, this fund lagged 99% of its large-
growth category peers.  Rajiv Kaul, current manager of Fidelity 
Advisor Aggressive Growth (FGVAX), will assume Bertelson's spot, 
while Bertelson takes over the 20% equity stake of the Fidelity 
Asset Manager: Income Fund (FASIX).  Fidelity Investments looks 
for fund manager performance that ranks in the top two quartiles 
of its relative category, and when performance falls to third or 
fourth quartile, a portfolio management change typically ensues.

One fund reopens; another one closes.  Fremont U.S. Micro-Cap 
(FUSMX) reportedly will close its doors to new investors this 
Wednesday.  While its assets have shrunk to near $300 million, 
the Fremont Funds believe that closing the micro-cap fund now 
will ensure that the fund "doesn't compromise its style" when 
micro-cap stocks eventually recover.  It's not the first time 
Fremont Funds has closed the micro-cap product.  It closed in 
March 2000, then reopened in January 2001.

Evergreen Investments is adopting a fund favorite of ours, the 
Pelican Fund (PELFX) advised by Grantham, Mayo, Van Otterloo & 
Company ("GMO"), and renaming it the Evergreen Large Cap Value 
Fund.  Its relatively low expense and volatility combined with 
above average yield and total return make it a suitable "core" 
equity investment.  The Pelican Fund's trailing 10-year return 
through October 31, 2002 of 10.7% (annualized) was 0.9% higher 
than the S&P 500 index and strong enough to rank it in the top 
quintile within the large-cap growth category, per Morningstar.  
GMO managers Ed Choi and Dick Dahlberg will continue to manage 
the fund in the same style, Morningstar said.

Morningstar also ran an interesting piece on so-called principal 
protection funds, indicating that Pioneer Funds has joined other 
fund families offering "principal protection for a price."  But 
in this world, there's no free lunch.  The catch in these funds 
is that you have to commit your money for a period of time such 
as seven years, and will have to pay higher expenses than you'd 
typically have to for the average mutual fund.  You may also be 
giving up some upside potential if fund assets are invested too 

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

Steve Wagner
Editor, Mutual Investor 


And Now For Something Completely Different
by Mark Phillips

Ok, well maybe not.  My apologies, as I spent some time this
weekend watching old Monty Python skits, and today's title
phrase is now firmly planted in my frontal lobe.  In all
seriousness though, I really do want to look at a topic we've
covered before, but perhaps from a different, or perhaps more
detailed perspective.  My chosen topic for the day is Relative
Strength, and I want to apply it to finding a good bearish trade
in the Home Construction sector.  Another way to view this
article is as an anatomy of a bearish trade, with you the reader
tagging along in my thought process.    Before you figure this
is going to be more of the same, let me try one shameless tease
to keep you interested.  I promise lots of pretty pictures!  GRIN
Fasten your seatbelts, here we go!

Coming back on track, long-time readers know that I've been
leaning bearish on the Housing sector for quite some time now.
To be fair, I probably got bearish much too early, but from the
look of things, the rest of the market is now coming around to
my way of thinking.  Let's start out with the chart of the Dow
Jones US Home Construction index ($DJUSHB), which ought to give
us a good idea for what is happening with the sector.  

Daily chart of the Home Construction index ($DJUSHB)

All right, from the above chart, the $DJUSHB certainly looked
to be weakening, but the next step is to determine if it is
appreciably weaker than the rest of the market.  Let's do a
quick RS comparison with the S&P 500.

For those of you that are new to relative strength studies, I'm
not going to cover the basics here today.  Those looking for
introductory material will want to first take a look at these
two articles before proceeding with the remainder of our
discussion of the day.

Relativity - It's Not Just For Phsycists
More on Relative Strength

Relative Strength Chart of $DJUSHB vs. S&P 500 - Daily Interval

Alright!  From that RS chart we can clearly see that the $DJUSHB
has been weakening against the broader market since early July.
Even the support levels at 0.34 and just above 0.33 failed to
contain the selling.  Based on the RS breakdown, we can make
the case for a bearish triangle breakdown -- looking good for
the bears, but how to play it?

There are four Housing stocks that I have been watching on a
regular basis: CTX, LEN (current LEAPS Put play), PHM (current
OI Put Play) and RYL.  Now that we've identified the overall
sector as bearish, our next step is to figure out which of these
four stocks should provide the easiest pickings for a downside
trade.  Rather than just jumping into the RS charts, let's first
take a gander at the daily charts of each stock and see if there
are some subjective clues to be gleaned.

Daily Charts of CTX and LEN - Side by Side Comparison

Just eye-balling those two charts, I'd definitely have to give
the nod to LEN as the weaker of the two stocks.  The pattern of
lower highs is more convincing, and LEN has already taken out
the late-October low support and is working away on the lows
from early October.  On the other hand, CTX is still holding
support in the $43-44 area, stubbornly refusing to come anywhere
near a breakdown.  I read that as relative strength on the part
of CTX.  The Stochastics back up this view.  While we did get a
lower Stochastics high on CTX, look at LEN -- that latest
rebound attempt barely lifted the daily Stochs and now they're
drifting down again.  LEN is definitely the weaker of these two.
Now let's take a look at the other two housing stocks on my
radar screen.

Daily Charts of PHM and RYL - Side by Side Comparison

The chart of PHM actually reminds me of the CTX chart.  An
argument could be made that the late October lows have been
violated, but that broad support zone from $43.00-44.50 is still
holding it up.  If we get a breakdown here, it could fall all the
way to the $37 area, which does give PHM some solid downside
potential -- but we need that breakdown first.  RYL actually
looks more promising in this comparison, as it already smashed
down through its late October lows near $40 and is working on
that next level of support near $36.  The problem with playing
RYL is the limited reward potential.  Even if the current $36
support fails, there's really only about $4 of potential reward
to the $32 level.

Based on this subjective comparison, my bias would be that LEN
would make the best short of the group, based on relative
strength.  I have intentionally not looked at any Relative
Strength charts of any of these four stocks yet.  I wanted to
first try to let my brain determine where the strength and
weakness lies.  I should be able to get a good idea of which
is stronger and which is weaker by doing the sort of analysis
I've listed above.  The next task is to actually look at the
relative strength charts, first comparing each stock to the
$DJUSHB.  Then to gain a slightly different perspective, we can
ratio each of these four stocks against each other.  Traders
that have ever done relative strength spreads know how useful
that last comparison could be!

I've been endeavoring of late, to make our regular visits more
interactive, and hopefully more valuable to you.  So rather than
plunge into those relative strength charts here today, I'm going
to leave it as an exercise for the student.  Pull up those RS
charts in your charting program and decide for yourself which of
our four stocks is the strongest and which is the weakest.  Feel
free to email me with your answer.  We should be able to mix the
more interesting responses with my own analysis and come up with
a valuable discussion next time.  Don't worry if you don't have
the ability to look at these RS charts, or you really don't know
the answer.  I'll delve into that part of the discussion on
Wednesday.  While my mid-week article is normally devoted to
Options 101 (and this is definitely a Trader's Corner topic), I
think we can find a way to make the discussion fit into that
venue.  Remember my comment above about a relative strength
spread?  We'll come back to that on Wednesday.

In the meantime, happy hunting!


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That was the official excuse given for the poor market performance 
on Monday but in reality there were many indications that more 
concerns than Iraq were on traders minds. Earnings, economy, 
Greenspan and lack of money being swapped out of bonds and 
into stocks all weighed on the markets.

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The Option Investor Newsletter                   Monday 11-11-2002
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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I've Fallen and I Can't Get up

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Free Falling

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