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Daily Newsletter, Tuesday, 01/07/2003

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The Option Investor Newsletter                 Tuesday 01-07-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Sell the News
Futures Markets: Back in the Band
Index Trader Wrap: OK, but at what level?
Market Sentiment: Consolidation
Weekly Fund Screen: Best Managers Never to Win Morningstar Domestic 
Stock Manager of the Year Award


Updated on the site tonight:
Swing Trader Game Plan: Out of Steam?


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      01-07-2003           High     Low     Volume Advance/Decline
DJIA     8740.59 - 33.00  8802.64  8713.03 1.93 bln   1289/1988
NASDAQ   1431.57 + 10.30  1442.26  1416.23 1.74 bln   1610/1791
S&P 100   467.84 -  1.90   471.83   465.90   Totals   2899/3779
S&P 500   922.93 -  6.08   930.81   919.93 
W5000    8713.70 - 58.50  8781.71  8685.08
RUS 2000  393.95 -  3.05   397.36   391.19 
DJ TRANS 2396.89 - 24.80  2421.58  2382.11   
VIX        27.48 +  0.07    28.28    27.00   
VXN        42.96 -  0.49    45.35    42.96 
Total Volume 3.886M
Total UpVol  2,120M
Total DnVol  1,714M
52wk Highs  251
52wk Lows    61
TRIN       0.86
PUT/CALL    .66
************************************************************

Sell the News

You saw it in real time. The president spoke, said several
things that would be bullish for the future and the result
was negative. Initially we saw a nice bounce back to 8800
but once the resistance was touched the direction was straight
down. Did that mean traders did not believe him? No, but the
news had been out for a couple days and this was the "is that
all?" result. Now we begin a long drawn out argument on the 
proposals and several months before anything may become law. 

Dow chart – Daily


 

Nasdaq chart – daily


 


The markets got off to a rocky start this morning after the
Factory Orders fell -0.8% in November. This was slightly more
than expected and was the third decline in the last four months.
Nondefense capital goods, which is a good indicator of private
investment, dropped -2.6%. Order backlog fell to the lowest
level since 1996. The broadest indicators seem to show that
consumer spending is continuing to slow and business investment
remains weak. This weakness throws additional doubt on the ISM
numbers from last week. A note on the ISM, the institute itself
was at a loss to explain why the number rocketed so high. This
leads traders to believe that it was an anomaly and the January
number could be much weaker again. The new stimulus plan will
have no immediate impact on Factory Orders as the real benefits
could take sometime to appear and they are directed at the
consumer. 

On the positive side the Retail Sales index only dipped slightly
by -0.2% and was much better than analysts had expected. This
is causing the Bank of Tokyo, which tracks chain store sales, 
to revise its total estimate of holiday sales due out Thursday.
They raised their estimates to +2% to +2.5% growth for the two
month holiday period. The rush of consumers back into the stores
to cash in gift certificates and holiday gift money was stronger
than expected. It is unknown yet what impact the returns will 
have on the overall sales. 

The Mortgage Bankers Association announced that the foreclosure
rate for the 3Q reached an all time high. The weak economy and
rising unemployment combined to push the rate to 1.15% in the
3Q. The previous high was 1.14% in 1999. They did say the rate
of loans moving into the foreclosure period had slowed slightly.
They said that foreclosures from sub prime borrowers, those with 
prior credit problems, had fallen from 2.88% to 2.08%. The
association said it appeared those borrowers with unemployment
risk had already faced the challenge and without a second
economic dip the worst could be over for the industry. Now all
they have to do is find somebody with a job and credit to buy
those foreclosed homes. According to the recent home sales
numbers they should not have any trouble. The buyers are still
there if the price is right. 

The big news today was the president's press conference. President
Bush proposed to reduce taxation on dividends, accelerate the
elimination of the marriage penalty, raise the child credit to
$1000 and place restrictions on the alternative minimum tax. A
total of $675 billion in tax reductions over the next ten years.
This package had been telegraphed over the last several days
and the market had already seen the bullish result on Monday. 
The problems with the plan are several. First it has to be passed
and the Democrats are going to be pushing their plan instead. 
It is going to be a long process and could take several months. 
Secondly the majority of the benefits will take time to flow
through to the markets. Most investors are not taxed on dividends
anyway since they are invested in 401Ks or IRAs. This means 
there is not a real and immediate benefit to individual investors.
There will be a long term benefit but not something immediately
visible to the markets. 

Another challenge to the dividend plan is that it tends to 
benefit value stocks instead of growth stocks. With investors
more interested in seeing CSCO hit $40 again instead of paying
a 25 cent dividend the movement in stocks could be minimal. 
The biggest section of stocks, which will benefit will be banks
and utilities who already pay dividends. Many of the big tech
stocks made statements about their plans. Oracle said they 
might consider a dividend plan. Dell also made some weak
comments about the possibility. Intel, which already pays a
minimal dividend, said they would review the plan IF the tax
cut was approved. Cisco, with $21 billion in cash on hand, had
just made a statement that said they would attempt to use their 
cash to grow the business so don't expect a dividend there. MSFT,
with $40 billion in cash, did not rush to the press with news
of a pending change in their dividend views. MSFT likes to 
award dividends in the form of stock splits at $120. Most
MSFT investors would love to see that happen again. The bottom
line for me is that the stimulus package will eventually be
better for the economy but do not expect a windfall any time
soon. 

A windfall is what Gateway is going to need to get out of
trouble. They warned at the close that they would miss prior
estimates of a -.13 cent loss and would now lose -18 to -19
cents and depending on problems with a partner maybe even
3 cents worse than that. GTW fell to $2.95 in after hours
trading. The problem according to Gateway was weaker than
expected demand in the 4Q and they said that weak demand
was carrying over to the 1Q. Oops! Gateway said it was 
looking at its 272 stores and may close some as leases
expire this year. 

GE said today that members of the IUEW/Communication Workers 
of America were going to hold a two day strike next week. 
20,000 workers are protesting an increase in health care
co-payments. United Electrical Radio and Machine Workers will
also strike at the same time. GE increased the co-pay by $200
an employee for 2003 and said the cost of healthcare per
employee was +$2,350 higher than it was three years ago.

Despite all the good news and the multiple attempts to break
into positive territory the internals were still bad. The 
new highs across all markets was the only really positive
indicator with 251 new highs compared to 61 new lows. The
declines still beat advancers 4:3. That is not a big ratio
but the indications were clear. Volume was very high with 
nearly four billion shares traded. High volume, declines
over advancers and another dead stop at 8800 resistance. 
The VIX is trading just above yesterday's low near 27 and
the TRIN is neutral at .86 as well as the Put/Call ratio
at .66. There just does not appear to be an overriding 
reason to go long at this altitude. If anything it would
appear the +400 points gained in 2003 were at risk for profit
taking. The economic calendar for Wednesday has Consumer
Credit and Mortgage Applications as the only material events.
Thursday has Jobless Claims where we will get to see if the
holiday numbers were bogus and Chain Store Sales. Friday 
is the important Nonfarm Payrolls and the real indicator
of economic health. 

As an investor I would be concerned about the overhead 
resistance just in front of earnings season. Alcoa is the
first Dow stock to announce earnings this week but next
week there will be a flurry of big companies. Nobody 
knows how this will end. EMC raised estimates and GTW
warned. DYN raised guidance and Cigna lowered. Make no
mistake the 4Q was tough for most companies. There are
still those leading edge companies like EMC where even in
a flat economy usage of its products continues. We just 
need to be guarded in our optimism even if the markets 
appear bullish. The biggest drops tend to occur when all 
the surface signals tend to be weakly positive after a
big run. If we do get a pull back on either bad news or 
profit taking I see Dow 8650 as primary support with 
8550 below that. 

The most bullish index is the Nasdaq where the Compx has 
risen to just above very strong resistance at 1425. This 
is very bullish for techs if it can hold. Today's move 
actually added +10 points to yesterday's very bullish
action. The Nasdaq has already added nearly +100 points 
for 2003. Even if tech stocks were going to continue upward 
the possibility of profit taking ahead of next weeks earnings
is strong. It appears the flood of retirement contributions
from the year end close is targeting the techs. When that 
money runs out (4-10 days) there could be a serious dip. 
Do your homework when placing bets and be sure to use
stops to protect your capital. 

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


**********************
Annual Renewal Special - only 6 days left !
**********************

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The highlights include two option expiration mousepads to 
which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books
by leading market professionals like John Murphy and and Jim
Rodgers. We even brought back the Trading Strategies CD from
last year for all the new subscribers who have been asking
for it.

Click here for the full details:
https://secure.sungrp.com/03renewal/


***************
FUTURES MARKETS
***************

Back in the Band
By John Seckinger
jseckinger@OptionInvestor.com

All three futures contacts closed back inside their daily 
Bollinger Bands.  The question is, even with a possible ‘tweezer 
top’ candlestick formation in both the YM and ES contracts, does 
it make sense to wait for more weakness?

Tuesday, January 7th at 4:15 P.M. 

Contract      Last    Net Change     High        Low       Volume    

Dow Jones..  8740.59   -32.98      8802.64     8713.03
YM03H        8740.00    +3.00      8788.00     8691.00     25,276

Nasdaq-100   1071.85   +10.37      1082.52     1057.16     
NQ03H        1075.00   +14.00      1085.50     1056.00    312,020

S&P 500       922.93    -6.08       930.81      922.93
ES03H         923.50    -3.00       930.50      918.75    670,733

ES03H  = E-mini SP500 futures    
YM03H  = E-mini Dow $5 futures   
NQ03H  = E-mini NDX 100 futures  

Note:  The 03H suffix stands for 2003, March, 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.  

Notes:  Support, Resistance, and Pivotal level for Dow, SPX, and 
NDX will be posted in the Market Monitor every morning at 
approximately 9:30 a.m.  

=================================================================

The March Mini-sized Dow Contract (YM03H)

Does it all come down to whether or not taxes will be eliminated 
on a corporate level when a company issues a dividend?  I do 
believe this is a big question in traders’ minds.  I also feel 
this has been a reason for the futures contracts trading at a 
premium to cash.  This difference should narrow as the futures 
contract approaches its delivery date, since on the last trading 
day the futures price and the underlying "cash" price will 
converge.  The spread between cash and futures could still 
continue to widen in the near term, especially between the NQ and 
NDX contracts. 

On Tuesday, the YM contract finally tested its pivot; however, 
bulls did not waver.  Going forward, there are a few scenarios 
that could take place.  One is higher prices above 8760, 8800, 
and then talk of a move back towards the 9000 area.  The other 
two are either looking to sell the contract under the 61.8% daily 
retracement level (8714) and then added to once S1 (8691) is 
cleared.  The other would be to wait for a test of S2(8643) and 
then looking to sell rallies back towards the 8714 area.  Longs 
could also look for a bounce at both the pivot of 8740 and 8714.  

Chart of Mini-sized Dow Contract, Daily


 

Trading a range bound market is not easy, and let us hope that we 
don’t see the same kind of price action on Wednesday in the YM 
contract.  If we do, look for resistance at 8800 (or R1 of 8788, 
which should be more important) and/or 8837.  If the Dow finds S2 
during the first 30-minutes, this level should line up with the 
rising blue trend line.  If either S2 or R2 is cleared, use 
fitted retracements based on a five-minute pattern.  An article 
on this method can be found in Tuesday night’s Investor Education 
section.  I still have a bias to the upside, despite the fact 
that there is a bearish divergence in the RSI and it looks like a 
‘tweezer top’ at 8788.  If 8643 is taken out, my bias will 
definitely change.  

Chart of YM03H, 30-minute


 

Bullish Percent of Dow Jones:  56% (Recent High at 72%, last 
Significant Low at 10%).  There is now a new column of X’s in 
place.  Look now for a move back up to 60%, with a print of 48 
canceling out the recent bullishness.  

YM03H

Support               Resistance                Pivot    

8691.00               8788.00                   8740.00
8643.00               8837.00

The March E-mini Nasdaq 100 Contract (NQ03H)

There certainly was some resistance at the 1078 resistance area 
outlined yesterday and today (added another red line for a “band 
of resistance” in chart below).  Since there has not been a 
losing session in four days, least resistance continues to be
higher until a relative high is clearly found.  This is called 
“inefficient trading:  The search for value.”  Only if S2 
(1042.75) is hit will I take a more neutral to ‘selling rallies’ 
approach.  It simply has not worked very well in the last few 
days, especially with this contract clearly outperforming.  The 
short-term objective, as seen on the daily chart, is for a move 
to 1090 and the 61.8% retracement area.  This matches up well 
with R1.  R2 is above at 1101.75.   

Chart of NQ03H, Daily


 

Is it time to think about a failure, since 1078 was taken out and 
the NQ failed to rise to 1094 (noted in last night’s futures 
wrap)?  With Wednesday’s pivot just below at 1072.25, shorts can 
certainly look for a move from the pivot to S1 (1058.75); 
however, I would still be nervous holding a short overnight.  The 
broadening top within the stochastic oscillator does give the 
likelihood of more weakness; however, make sure the oscillator is 
checked if S2 is in fact tested.  I imagine it will trade to the 
lower band relatively fast.  It seems like there are still a 
significant amount of shorts in the market (especially with the 
potential ‘right shoulder’ in the equity markets); therefore, 
playing from the long side is more aggressive but could offer 
more reward as shorts will most likely be forced to scale out 
once above the 1088-1090 area.   

Chart of NQ03H, 60-minute


 

Bullish Percent for NDX:  62% (Recent High at 82%, last 
Significant Low at 14%)  The recent column of O’s still stands at 
11, despite the rise on Monday and intra-day high on Tuesday.  
This indicator still points towards more risk in buying than 
selling; therefore, continue to use tight stops on positions.   

NQ03H

Support              Resistance                 Pivot 

1058.75              1088.25                    1072.25
1042.75              1101.75

The March E-mini S&P 500 Contract (ES03H)

Well, the 937 level was never hit; however, it certainly does not 
mean that it will not be.  The pros and cons are listed within 
the chart, and I do believe that only a quarter position is 
warranted for either a long or short at current levels.  In fact, 
I would wait for a move to either 912.50 and then take the 
position of selling rallies, or look for an explosive rally above 
Monday’s high of 930.50.  Aggressive shorts can look for a move 
from the pivot to S1, and then re-evaluate to see if S2 can in 
fact be reached.  

Chart of ES03H, Daily


 

Yesterday, I thought of using 931 as a pivot, and Tuesday’s high 
of 930.50 didn’t prove that theory wrong.  For Wednesday, shorts 
will first need the blue trend line (see chart below) to be 
broken and then used as resistance.  If done in the first 30-
minutes of trading, it will mean a break of 921.50 and both the 
pivot outlined as well as an intra-day retracement level.  Once 
this level is taken out, shorts should have an objective of 918 
and then possibly 912.50.  Since the range between R2 and S2 is 
relatively tight, it should be used for only scalpers looking to 
capture a few points.   

Chart of ES03H, 30-minute


 

Bullish Percent of SPX:  60% (Recent High at 66%, Last 
Significant Low at 20%).  There is still risk in buying the 
contract, and note that the number has not risen and gone into a 
column of X’s after Thursday’s and Monday’s rally.  The weakness 
on Monday did little to change this indicator. 

ES03H

Support              Resistance                 Pivot    

918.00               929.75                     924.25
912.50               936.00

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com 


**********************  
Annual Renewal Special
**********************  

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/#m


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

OK, but at what level?

Stocks saw a mixed session today with the Dow Industrials, S&P 
500 and S&P 100 indexes trading fractionally lower, while the 
NASDAQ Composite and more heavily weighted NASDAQ-100 index both 
posted offsetting gains.

A rather lackluster session was witness after President Bush 
unveiled his administration's "growth and jobs plan," which calls 
for roughly $670 billion worth of stimulus over the next 10 
years, with a great deal of focus by investment market 
participants centered on the elimination of taxes that 
shareholders pay on corporate dividends.

While recent week's focus was "war with Iraq," a new discussion 
has surfaced that roils the equity markets.  

No longer is the most asked question "when are we going to war 
with Iraq" being asked, but "at what level will the elimination 
of taxes on dividends be seen?"

I say the markets are "roiled" as I could not really figure out 
why the markets would have rallied to the extent they did 
yesterday.  It wasn't until my head was about to hit the pillow 
last night that I might have unveiled the "answer" for myself, 
but found some other market analysts also wondering if it could 
be true.

I don't think that the government is willing to totally do away 
with tax cuts on dividends paid by publicly traded companies to 
its investors, but I do think that the Bush administration and 
perhaps broader government is at least willing to do away with 
the "double taxation" of dividends that currently has 
corporations paying taxes on a pre-dividend distribution, and 
individuals that pay income tax on stock dividend distributions 
they receive.

So at what level will the government decide on providing the 
dividend tax relief?  I'd argue that it should be done at the 
corporate level.  Here's why.

What about the investor that holds a portfolio of "Dow Dogs" as 
his yearly investment strategy in a tax deferred account?  The 
bulk of investors stock investments on an individual basis are 
held in some type of tax-deferred account.  Would an elimination 
of taxes on stock dividends do much to stimulate the economy if a 
tax-deferred investor that isn't paying taxes on tax-deferred 
accounts see any type of near-term benefit?  The elimination of 
dividend taxes at the individual investor level, also stands the 
confusion of how taxes will be paid on distributions from a tax-
deferred vehicle like a 401k or IRA when the investor does take 
distributions.  For example, if I've been paid $10,000 in 
corporate dividends over the past 20-years, how will I be taxed 
under the current tax code on a $5,000 distribution?  You can see 
how an already "complex" tax code could get even more complex.

But what happens if the government decides to provide the 
dividend tax relief at the corporate level?  

Let's take Philip Morris (NYSE:MO) $41.13 +4.1% as an example.  
This is one of this year's "Dow Dogs" and currently shows a 6.22% 
dividend yield, as the company currently has an annual dividend 
declaration of $2.56 per share.  On a quarterly basis, this would 
be equivalent to $0.64.

What if a company like Philip Morris (MO), which currently pays a 
corporate net income tax were to be able to deduct from its net 
income, which it pays taxes on, $0.64 per share each quarter or 
$2.56 per share annually?  With roughly 2 billion shares 
outstanding, this could amount to a $1.28 billion quarterly tax 
cut from its bottom line, or $5.12 billion on an annual basis.

While we've "learned" the past year or two that corporate 
accounting and "tax loopholes" at the corporate level can be 
tricky, dealing with tax dividend cuts at the corporate level may 
be "simpler."

Could it be that part of yesterday's "tax dividend cut rally" was 
in part due to the notion, if not uncertainty among traders and 
investors (bullish and bearish), that the handling of a tax cut 
at the corporate level could actually have a company like Philip 
Morris, which shows a trailing 12-month EPS of $5.34 boosting its 
after-tax EPS by $2.56 (this is the annual dividend that may no 
longer be taxed) per share to an annual EPS of $7.90?  

Under simple math as just described, MO's current price/earnings 
ratio of 7.7 could fall to 5.2 and perhaps create an 
"undervalued" type of fundamental situation (if price were kept 
at today's close of $41.13).  Why was MO's 4.1% today's biggest 
Dow gainer?

Why is our "Dow Dog" portfolio showing a 7.34% gain so far this 
year, while the Dow Industrials (INDU) itself showing a 4.78% 
gain in the first 4 sessions of the new year?  Could it be that 
the larger dividend yielding stocks suddenly become somewhat 
"undervalued" relative to their peers under a "corporate level" 
tax dividend cut scenario?

And what about many NASDAQ stocks that either doesn't pay 
dividends or pay much smaller dividends.  Dow component and 
software industry giant Microsoft (NASDAQ:MSFT) $55.80 +1.88% 
while cash rich has chosen not to pay a dividend.  Instead, the 
company has had more of an acquisition focus, looking to spend 
its cash on acquisitions to try and build its bottom line growth.  
While the company said today it would not pursue a dividend 
strategy for its stock, one might have to wonder if it might not 
eventually pay a dividend if shareholders begin "demanding" a 
dividend in order to see benefit from the large cash reserves.  
Even better perhaps is a boost to MSFT's bottom line EPS if the 
dividend the company declares has the company's P/E ratio falling 
and perhaps creating another "undervalued" situation on a P/E 
measurement.

While the above discussion may be considered "fuzzy math" the 
scenario of a corporate level "dividend tax cut" does perhaps 
place a slightly different "valuation" on the equity markets all 
of a sudden.

So do we all of a sudden bet our last earned dollar on a 
corporate level tax dividend cut?  Nope.  I don't think so.  I 
discuss this tonight only to present a potential scenario for 
further bullishness.  Something I just did grasp yesterday as I 
was thinking only about a tax dividend cut at the individual 
investor level.

Some may argue that a corporate level tax cut wouldn't stimulate 
the economy, as the individual investor doesn't see the tax 
relief.  However, the potential for a suddenly "undervalued" 
equity market among dividend paying companies that could see a 
price increase in their shares as P/E multiples see declines as 
dividends are not taxed, and helps boost the bottom line, could 
create a catalyst for bullish equity markets and also boost 
investor and consumer confidence, which in turn could influence 
consumer spending.

These thoughts are all open for discussion in the days and weeks 
ahead.  Not only buy you and I as investors/traders, but by 
Congress that would have to approve any such tax cuts.

Onward we go

A few subscribers have asked that I post the daily "pivot" and 
support/resistance levels from John Seckinger's pivot analysis 
trading technique in the nightly wraps.  John wrote about these 
daily "pivot" and support/resistance levels, often used by SHORT 
TERM traders in one of his Trader's Corner articles on December 
12th http://www.OptionInvestor.com/futurescorner/fc_121202_1.asp

Here are tomorrow's index pivot and support/resistance levels.  
Some of the "Support 1" or S1 may have correlative importance 
tomorrow.

Daily Pivot/Levels for Wednesday

INDU : S2=8,662, S1=8,700, P=8,751 , R1=8,789, R2=8,840

SPX : S2=914, S1= 918, P=924.50, R1=929, R2=935

OEX : S2= 463, S1=465, P=468.50, R1=471, R2=475

NDX: S2=1,045, S1= 1,058, P= 1,070, R1=1,084, R2=1,096

QQQ: S2=25.93, S1=26.29, P= 26.61, R1=26.97, R2=27.29


First and foremost, traders should be alert to the fact that the 
very narrow Dow Industrials Bullish % ($BPINDU) reversed back 
into "bull confirmed" status today.  Yesterday, shares of 
International Business Machines (NYSE:IBM) $86.00 +2.8% gave a 
reversing point and figure buy signal at $83.00, and today's 
trade at $20.00 has fellow Dow component Hewlett Packard 
(NYSE:HPQ) $19.95 +1.52% giving a reversing point and figure buy 
signal.  The two combined account for 6.66% and this small number 
of stocks has the bullish % reversing up the needed 6% to get the 
Dow's bullish % back into a column of X and "bull confirmed" 
status.  This will have Dow Index bears on heightened alert for 
bullishness in the index itself on a break much above today's 
highs of 8,802.64.  While the Dow bullish % is a VERY narrow 
indicator (just 30 stocks) the ability of these two technology 
stocks to generate reversing "buy signals" can be early hint of 
more meaningful longer-term bullishness and positions should be 
monitored closely.

Dow Industrials Chart - Daily Interval


 

While the Dow bullish % is a very narrow indicator, it is 
"suspicious" that technology components IBM and HPQ are the two 
stocks to have recently given reversing "buy signals" that 
attribute to the Dow bullish % reversal.  Just as the reversal 
lower in the bullish % from 72% was "bear alert" I think today's 
reversal back into "bull confirmed" status should be observed by 
bearish Dow traders.  While the reversal in the bullish % could 
well be due to a short-term "oversold" bounce, if bearish the 
Dow, then a bearish trader would want to see the Dow break back 
below the 8,690 level in the next session and tomorrow's S1 level 
of 8,700 would be a starting point.  On a reversal higher, I do 
think Dow bulls can look to play long, but use S1 of 8,700 or a 
level just below 8,690 as a stop.  If bullish on the bullish % 
reversal, a bull would want to see some bullish confirmation from 
the S&P 100 Bullish % ($BPOEX) in the next couple of sessions.

What I will monitor here is what we discussed back in late 
November and December.  We talked about the POTENTIAL for the Dow 
bullish % to reverse down to 50%, which is often a "normal" 
occurrence from a "bear alert" status, a rebound in the bullish % 
to take place.  This has taken place as of today's close.

Bears are NOT out of the game at this point in my opinion, 
especially if 8,800 continues to serve resistance.  Should the 
recent rally fail (in both the Dow index and the bullish %) and 
the bullish % fall to 48%, this would have the bullish % reading 
"bear confirmed."  

Those traders using Elliot Wave analysis with the thought that 
the recent rally now reverses to another wave lower will 
understand the scenario of how these technicals can play out.  
Suffice it to say, I think the Dow Industrials are at a critical 
juncture here at 8,800.

In the coming sessions, if the Dow "eases" into the 8,500 level, 
bearish traders holding FULL position short may be well served to 
cut back on positions to 1/2 near the 8,500 level while keeping 
an eye on the other bullish % charts.

S&P 100 Index - Daily Chart


 

A very favorable risk/reward trade for bears is found in the OEX 
with a tight stop above 475.  We see some correlation with 
retracement set from the Oct. lows to December high with 
tomorrow's "pivot" of 468.53 to be exact, with the 19.1% 
retracement above.  Even today's OEX high of 471.83 and 
yesterday's high of 471.41 has some correlation with tomorrow's 
R1 of 471.16 from pivot analysis.  If bears have conviction to 
the downside, they should show it tomorrow.

While the broader S&P 500 Bullish % ($BPSPX) showed no net change 
in its bullish %, the more narrow S&P 100 Bullish % ($BPOEX) 
showed a net gain of 1 stock to a reversing point and figure buy 
signal.  This has the S&P 100 Bullish % inching up to 59% and 
just 1%, or 1 reversing point and figure buy signal away from the 
needed 60% level to have this indicator following the Dow 
Industrials Bullish % higher too.

Bears will look to leverage off the technicals of 475, but bulls 
may also look to play a break higher with 1/4 or 1/2 positions on 
a break above that level on thoughts that the bullish % may 
reverse back into "bull confirmed" status and have the OEX giving 
some upside potential back near the December highs of 487.

S&P 500 Index Chart - Daily Interval


 

I certainly hadn't "factored" in a potential tax-dividend cut at 
the corporate level into any of my market scenarios and perhaps 
other market participants hadn't either.  This "new scenario" 
gives a bit of a twist to things creates a bit of uncertainty.

Using "conventional" retracement on the SPX from the October lows 
to recent December high, we see some tie in with tomorrow's S1 
from the S&P 500 daily pivot analysis.  It's my thought that if 
bears have conviction and bulls lack near-term courage of 
continued bullishness, then the SPX should break and close below 
the 918 level tomorrow.  

Bears that already have positions may look for this before even 
thinking of adding to positions.  If looking to put on a bearish 
position tomorrow, I would rather see a test of S2=914 and bounce 
back near S1= of 918.  Look to trade the daily levels from pivot 
analysis at this point.  In my opinion, with the Dow bullish % 
reversing up right now, I want to use it as an early sign of 
potential building strength.

At the same time, I become increasingly more focused on the S&P 
500 Bullish % ($BPSPX) which showed no net change to the bullish 
% and still reads "bull correction" at 60.6%.  Day by day we 
follow these internals as note the December 31st low reading of 
57.8%, so we have seen some marginal improvement in this broader 
bullish %.  Still, it would take a reading of 64% to have this 
indicator reversing back up into "bull confirmed" status, and a 
logical technical stop on the SPX chart would be just above 
Monday's high of 932 for the more risk averse bear.

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


 

Index traders might find it useful to use "combining" OEX 
resistance of 475 with QQQ resistance of $27 on a near-term basis 
to get a feel for the markets technicals.  Breaks higher would be 
considered technically bullish and could spur broader market 
short-covering.

One thing I'll not in the above chart is that the QQQ closed 
ABOVE it longer-term and trending lower 200-day SMA.  The QQQ 
closed above this 200-day SMA on December 2nd, which was the 
recent high on the above chart.  However, the QQQ could not close 
above this widely monitored SMA for two consecutive sessions.  
Tomorrow's close could be deemed important by bulls if they can 
hold a close above this longer-term SMA.  Our $28.18 level at 
61.8% retracement held support today and may be a sign that 
market makers are indeed seeing some "buy side" order flow taking 
place at trading desks, which may have found a shift toward 
demand for the Q's.  Tomorrow's R1 of $26.97 and our "volume 
pivot" of $27 are key near-term resistance, that if broken to the 
upside can have bulls playing long, with a rather nice and tight 
stop just below $26.18 or the rising 50-day SMA of $25.83, which 
would be below tomorrow's S2 of $25.93.

Today's action saw no net change in the NASDAQ-100 Bullish % 
($BPNDX) and reading here remains "bear alert" at 62% and would 
currently need to see a reversal back to 66% to have this 
indicator reversing back into "bull confirmed" status.

Jeff Bailey


**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/#m
**************************************************************

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

Consolidation
by Steven Price

The markets took a break today to digest the dueling economic 
plans offered by the President and the democrats.  In spite of a 
slew of pre-announcements, some of which were surprisingly 
positive, the big rally of the last few days finally went into 
consolidation mode.  The big question now is whether the 
consolidation is just a breather before another leg up, or the 
exhaustion of a bear market rally.   

Monday's boost certainly was more than just fluff, as a removal 
of the dividend tax sought by the President would make stocks 
more attractive and create real value in the equity market. 
However, the run up during the previous days seemed to be simply 
an oversold bounce.  It really doesn't matter what the driving 
force is, as long as we try to trade what we see. So far, we are 
seeing support at a higher level and that's good news for bulls.  
That support above Dow 8700 however, is up against some heavy 
resistance and today's action showed that resistance still in 
place at Dow 8800.  After topping out at 8800 on Monday, today's 
high reached 8802 before failing.

Retail disappointments continued as Tiffany's lowered guidance, 
based on sales trends and lower margins. The company said, " "We 
believe that these holiday season results, which were below our 
expectations, reflect the same consumer sentiments that are 
adversely affecting other retailers in U.S. and international 
markets."  Circuit City also announced that it saw a same store 
sales decline of 6% in December and total sales decreased 5% in 
the same month.  The stock actually posted a small gain, 
following an announcement that it would buy back $200 million of 
its shares. 

Techs got a boost, partly due to EMC's news after the bell on 
Monday that it was raising guidance.  The company said it would 
earn $0.01-$0.02 per share, rather than the previously forecast 
loss of $0.02. It also said that overall customer spending was 
better than anticipated, leading to $200 million in additional 
revenue above expectations.  That increased spending is probably 
the most important part of the announcement, as it will be the 
first sign of a turnaround for techs. 

The president outlined his tax-cut plan mid-afternoon.  While 
most of the details were already released Monday, he took the 
opportunity to detail new cuts and the acceleration of old ones.  
The markets got a boost when he got to the part about dividends, 
but didn't show the new legs they might have if bulls were 
looking for additional nuggets of information on which to hang 
their hats. 

The chip stocks continued higher again today, after Monday's run 
took the Semiconductor Index (SOX) through an important level of 
resistance at 330.  The index pulled back to closing support just 
above that previous resistance and built on that gain today. 
After trading as high as 343, the SOX closed at 333, indicating 
the possibility of another run at the December high of 393.   It 
was just a couple months ago that we were testing support at 200, 
and after an 80% gain, then a move back to the mid-point, we have 
climbed higher as reports of spending increases begin to leak out 
of the tech sector. 

The point and figure charts have shown some significant 
developments the last couple of days, as well.  The Dow trade of 
8800 actually broke through its descending bearish resistance 
line at 8750 and must have bears worried about the strength of a 
rally that can crack that barrier. The SPX trade of 930 also 
broke that bearish resistance line, confirming the Dow move. Both 
indices re-tested those levels today, and pulled back from them.  
If we are seeing a double top the last couple of days, then the 
bearish resistance breaks may have been the last gasp suckering 
in a few more longs.  However, we have yet to get a reversal down 
from those levels, which would come at Dow 8650 and SPX 915.  
Until that time, we still have a series of higher highs and 
higher lows.  On the other hand, the recent rally was not enough 
to turn the sinking Dow bullish percent back up into a column of 
"X."  The same goes for the SPX, OEX and NDX.  Until that 
happens, we may simply be seeing the oversold bounce bears were 
hoping for.


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  8740

Moving Averages:
(Simple)

 10-dma: 8506
 50-dma: 8564
200-dma: 8957



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  922

Moving Averages:
(Simple)

 10-dma:  898
 50-dma:  903
200-dma:  953



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1071

Moving Averages:
(Simple)

 10-dma: 1023
 50-dma: 1038
200-dma: 1068



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

The Semiconductor Index (SOX.X): The SOX continued its upward 
climb after breaking resistance at 330 on Monday.  That boost on 
Monday followed an upgrade to chip equipment stocks from Deutsche 
Bank, which rated the sector a BUY, saying that multiple delivery 
and order pull-ins would lead to quarterly growth of 15% to 20% 
versus than expectations of flat to 10 percent growth.  Monday's 
broad market rally on the President's bigger than expected 
dividend tax-reduction plan also helped boost the sector, 
although not many chip stocks pay dividends.  However, many do 
have cash reserves that would be cheaper to put into dividends if 
the tax breaks make it through Congress.  The 330 level was one 
of the more significant resistance levels throughout the first 
part of December and the move over that mark could signal another 
leg higher toward the August high resistance level of 365. The 
SOX saw a high of 343, only to fall all the way back to 333 by 
the close, mirroring the Nasdaq Composite's pullback from its 
200-dma. If the COMP gets some new legs to break through the 200-
dma of 1439 on a closing basis, then look for the SOX make that 
run to 365. If instead the COMP rolls over and the SOX fails to 
hold 330, it could be a quick trip back to 310.

52-week High: 657
52-week Low : 214
Current     : 333

Moving Averages:
(Simple)

 10-dma: 307
 50-dma: 319
200-dma: 375

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

Market Volatility

The VIX bounced off its lows after testing support at 26 the last 
couple of days and could be signaling a market pullback as it 
creeps higher.  It is viewed by some traders as a contra 
indicator when it reaches extremes, and the big drop on the 
equity rally may be signaling time for a turnaround.  It is still 
at relatively low levels, indicating a lack of fear in the 
market, but the last time it traded this low was the end of 
November, just before we rolled over and sold off 800 Dow points. 

CBOE Market Volatility Index (VIX) = 27.48 +0.07
Nasdaq-100 Volatility Index  (VXN) = 42.96 –0.49

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.66        688,849       453,839
Equity Only    0.52        570,010       292,411
OEX            1.03         22,304        23,030
QQQ            4.22         50,016        25,902


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

Bullish Percent Data

           Current   Change   Status
NYSE          52      + 0     Bull Confirmed
NASDAQ-100    62      + 3     Bear Alert
Dow Indust.   50      + 0     Bull Confirmed
S&P 500       61      + 2     Bull Correction
S&P 100       59      + 5     Bear Alert

Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

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

 5-Day Arms Index  0.85
10-Day Arms Index  1.35
21-Day Arms Index  1.33
55-Day Arms Index  1.21


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

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

Market Internals

        Advancers     Decliners
NYSE       1109          1799
NASDAQ     1530          1719

        New Highs      New Lows
NYSE        121              23
NASDAQ      103              28

        Volume (in millions)
NYSE       1,904
NASDAQ     1,728


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

Commitments Of Traders Report: 12/31/02

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

Commercials increased long positions, while reducing shorts, for 
a net long change of approximately 7,000 contracts.  Small 
traders increased shorts by 17,000 contracts, while leaving long 
positions relatively unchanged. 

Commercials   Long      Short      Net     % Of OI 
12/10/02      446,831   503,583   (56,752)   (5.9%)
12/17/02      465,361   528,896   (63,535)   (6.4%)
12/23/02      408,592   467,259   (58,667)   (6.7%)
12/31/02      410,968   462,782   (51,814)   (5.9%)

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year: ( 16,472) - 10/01/02

Small Traders Long      Short      Net     % of OI
12/10/02      162,115    71,505    90,610     38.8%
12/17/02      194,740    90,803   103,937     36.4%
12/23/02      138,756    58,236    80,520     40.9%
12/31/02      139,383    75,640    63,743     30.0%

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

Commercials left positions close to unchanged. Small traders 
increased longs significantly and reduced shorts slightly.


Commercials   Long      Short      Net     % of OI 
12/10/02       44,651     51,716   ( 7,065) ( 7.3%)
12/17/02       51,999     54,383   ( 2,384) ( 2.2%)
12/23/02       32,067     44,451   (12,384) (16.2%)
12/31/02       31,399     44,387   (12,988) (17.1%)


Most bearish reading of the year: (15,521) -  3/13/02
Most bullish reading of the year:   9,068  - 06/11/02

Small Traders  Long     Short      Net     % of OI
12/10/02       15,026     9,242     5,784    23.8%
12/17/02       23,027    18,027     5,000    12.2%
12/23/02       17,009     5,865    11,144    49.0%
12/31/02       19,841     5,009    14,832    60.1%

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:  14,832  - 12/31/02

DOW JONES INDUSTRIAL

Commercials added 1,000 contracts to their long positions, while 
leaving shorts relatively unchanged.  Small traders increased 
both positions slightly, with a slight reduction in the net short 
position. 

Commercials   Long      Short      Net     % of OI
12/10/02       19,953    15,759    4,194      11.7%
12/17/02       23,782    20,605    3,177       7.2%
12/23/02       14,991    11,103    3,888      14.9%
12/31/02       15,940    11,253    4,687      17.2%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
12/10/02        5,394     9,499    (4,105)   (27.6%)
12/17/02        5,498     9,045    (3,547)   (24.4%)
12/23/02        4,584     6,296    (1,712)   (15.7%)
12/31/02        4,997     6,553    (1,556)   (13.5%)

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

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


**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/#m
**************************************************************


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

Best Managers Never to Win Morningstar Domestic Stock Manager of the 
Year Award 

This week, we take an in-depth look at five great domestic equity 
managers who have never won Morningstar's "Domestic Stock Manager 
of the Year" award.  To win Morningstar's annual award, a manager 
or management team has to have a great current year in comparison 
to their fund peers, but they also need to possess an outstanding 
long-term record and act in a "shareholder-friendly" manner.  

Morningstar's Russ Kinnel asked readers to voice their opinion on 
the matter this week, putting five domestic stock managers on the 
ballot, as follows:

 1. Longleaf Partners Small-Cap (LLSCX)
 Manager: Mason Hawkins, Staley Cates and John Buford

 2. Vanguard PRIMECAP (VPMCX)
 Manager: Howard Schow, Theo Kolokotrones and Joel Fried

 3. Fidelity Magellan (FMAGX)
 Manager: Bob Stansky

 4. Wasatch Core Growth (WGROX)
 Manager: Sam Stewart

 5. T. Rowe Price Equity Income (PRFDX)
 Manager: Brian Rogers

It's hard to believe that none of these domestic equity managers 
have won the Morningstar award before, but with many good equity 
funds out there, the decision on who to give the award to is not 
always an easy one.  The Longleaf Partners and PRIMECAP managers 
have been together for a long time and have produced solid risk-
adjusted returns for investors over the long term.  Stansky has 
the difficult task of managing the giant Magellan Fund, and has 
done well in that charge, generating a "positive" 5-year return 
that ranks in the first quartile of the Morningstar large-blend 
category.  Sam Stewart at Wasatch has one of the best small-cap 
records in the business, while Brian Rogers has deftly managed 
the income-oriented T. Rowe Price Equity Income Fund since 1985.

What we're going to do this week is compare these five funds on 
various factors such as performance, risk, risk-adjusted return 
performance, annual expense, and portfolio characteristics.  In 
the end, we hope to arrive at the one manager we would pick for 
best "runnerup" if we had to choose one.  Our primary source of 
information will be www.morningstar.com but we may also look to 
see how Lipper rates the funds for return, capital preservation 
and other criteria.

Fund Comparisons

Morningstar's Fund Compare tool allows one to quickly evaluate 
funds against one another, to see which have the best returns, 
highest ratings, lowest risk, lowest expense ratios, and more.  
We entered the five fund symbols displayed above, and then ran 
the screener.  Below is a summary of our findings in each area.

Snapshot View:

Three of the funds invest primarily in large-cap stocks, while 
the other two funds are small-cap specialists.  Two funds have 
Morningstar's highest 5-star ratings for risk-adjusted returns 
within their category peer group, while another two are 4-star 
rated, signifying above average risk-adjusted performance when 
compared to category peers.  One fund has an average rating of 
three stars.  Four of the five funds have expense ratios below 
1.00% of assets per annum, with one sitting at 1.32%, which is 
still below average compared to the 1.40% mutual fund average.

 Fidelity Magellan (Large Blend) 3 Stars, 0.88% expense ratio
 Vanguard PRIMECAP (Large Blend) 4 Stars, 0.50% expense ratio
 Price Equity Income (Large Value) 5 Stars, 0.80% expense ratio
 Longleaf Small-Cap (Small Value) 4 Stars, 0.96% expense ratio
 Wasatch Core Grwth (Small Growth) 5 Stars, 1.32% expense ratio

So far in 2003, Fidelity Magellan, Vanguard PRIMECAP and Price 
Equity Income have YTD returns of five percent or more, on par 
with the S&P 500 index's 5.6% YTD total return.  Wasatch has a 
4.6% YTD total return, while Longleaf Partners had just a 1.8% 
total return since December 31, 2002.  In the next section, we 
take a closer look at fund performance through January 6, 2003.

Performance View:

The performance view shows total returns for various periods of 
time, including YTD, 1-month, 1-year, 3-years and 5-years, with 
3-year and 5-year performance shown on an average annual return 
("annualized") basis.  If you look back over the past 12 months, 
the fund that stands out is T. Rowe Price Equity Income managed 
by Brian Rogers.  Over the past 1-year period, Rogers has a 9.5% 
loss, but that is small compared to the S&P 500's 19.5% decline, 
and good enough to rank the fund in the top decile of the large-
cap value category, per Morningstar.  The team-managed Longleaf 
Partners Small-Cap Fund is down just 4.1% in the last 12 months, 
ranking in the top quintile (top 20%) of the small-value group.

For the trailing 3-year period (a volatile one), Wasatch's Core 
Growth Fund managed by Sam Stewart deserves recognition, giving 
investors an average annual total return of 14.1%, solid enough 
to rank the fund in the top 1% of the small-value category, per 
Morningstar.  That compares to an 11.6% average annual loss for 
the S&P 500 large-cap index.  So, indeed, a fine 3-year showing 
for Stewart's core growth product, a remarkable feat considering 
how poorly "growth-oriented" funds performed in the market slide 
of 2000-2002.  T. Rowe Price Equity Income Fund managed by Brian 
Rogers earned an average annual return of 2.3% over the trailing 
three years, ranking in the category's top decile again.  Rogers 
invests in established companies that pay dividends, so the fund 
benefitted from its yield component, which adds income/stability.

A look at trailing 5-year performance shows the superior returns 
produced by Sam Stewart for shareholders of Wasatch Core Growth.  
His 5-year annualized return of 11.6% outperformed the S&P large-
cap index by 11.0% a year on average, ranking the fund in top 5% 
of the small-cap growth category, per Morningstar.  Also placing 
in the top 5% of their respective category was Vanguard PRIMECAP, 
team-managed by PRIMECAP Management Company, which has enjoyed a 
long-term subadvisory relationship with the Vanguard Group along 
with Wellington Management Company.  Howard Schow et al produced 
an annualized return of 4.9% over the trailing 5-year period, to 
rank in the top 5% of the large-cap value group, per Morningstar.  
Brian Rogers, T. Rowe Price Equity Income Fund, averaged 3.8% to 
rank in the 11th percentile of the large-value category.

Risk View:

Interestingly, the Risk View shows all five funds rated as "high" 
risk relative to their category peers.  That is simply incorrect.  
Morningstar's individual fund reports show that only the Vanguard 
PRIMECAP Fund has high relative risk versus category peers, while 
Bob Stansky has produced above-average risk relative to his large 
blend peers.  The other three funds have had "below average" risk 
relative to their category peer groups.

Below is a summary of each fund's average standard deviation over 
the trailing 3-year period through December 31, 2002, ranked from 
lowest to highest.  Standard deviation measures the volatility of 
fund returns over a specific time period (Morningstar's number is 
based over the trailing 36 months).

 16.8% Fidelity Magellan
 17.0% T. Rowe Price Equity Income
 17.8% Longleaf Partners Small-Cap
 22.0% Vanguard PRIMECAP
 30.5% Wasatch Core Growth

For comparison purposes, Vanguard 500 Index (VFINX), which tracks 
the S&P 500 large-cap index, had a 16.4% standard deviation.  You 
can see that Fidelity Magellan and Price Equity Income have had a 
similar risk profile to the market (S&P 500 index).   It is clear 
that Vanguard PRIMECAP has been more volatile than its peers, but 
investors have been amply rewarded over time for the greater risk 
incurred.  Wasatch Core Growth has been the most volatile overall 
in absolute terms, but compared to other small-growth funds, risk 
has been below average.  Like PRIMECAP, Sam Stewart has more than 
compensated shareholders for the risk incurred by the fund.

Portfolio View:

All of the funds are billion-dollar funds, with Fidelity Magellan 
still reigning as the largest actively-managed equity fund in the 
country with $56.8 billion in assets.  Vanguard PRIMECAP is a $15 
billion fund today due to its long-term success.  T. Rowe Price's 
Equity Income Fund has over $10 billion in assets today thanks to 
Brian Rogers fine relative performance since 1985 fund inception.

Wasatch Core Growth Fund sports the lowest average P/E ratio and 
also the highest average earnings growth rate of the five equity 
funds.  So, Sam Stewart looks for rapidly growing companies that 
are cheaply priced.  That kept him out of technology for much of 
the market decline while other "pro-growth" funds went down with 
the ship.  Note that Bob Stansky has Fidelity Magellan structured 
the way I like to see general equity funds, with less price risk 
(lower P/E) and greater growth potential (higher earnings growth 
rate) than the market as measured by the S&P 500 index.  That is 
a nice blend of value and growth characteristics.  

Fidelity Magellan due to its sheer size has the largest average 
market capitalization, at $64.9 billion (decidedly "large-cap").  
T. Rowe Price Equity Income and Vanguard PRIMECAP funds land in 
Morningstar's large-cap style box, but the term "multi-cap" may 
be a better descriptor of the manager's style since mid-cap and 
small-cap stocks may also be held.  Longleaf Partners Small-Cap 
and Wasatch Core Growth funds have average market caps of about 
$1 billion, indicating that they hold both small-cap and midcap 
stocks.

In terms of yield, only two funds have trailing yields of 1.00% 
or more.  Longleaf Partners Small-Cap Fund has the highest fund 
yield (2.58%), followed by T. Rowe Price Equity Income Fund, at 
1.77%.  I expected to see T. Rowe Price's fund up there but not 
the Longleaf Partners small-cap product since small stock funds 
typically emphasize growth over income.

Nuts & Bolts View:

The last section of Morningstar Fund Compare results is called 
"nuts and bolts" and looks at such things as loads, costs, and 
annual expense ratio.  Unfortunately, three of these funds are 
currently closed to new investors: Fidelity Magellan, Longleaf 
Partners Small-Cap, and Wasatch Core Growth.  In fact, several 
Wasatch funds are currently closed, indicative of their superb 
absolute and relative performance over the past five years, in 
both good and bad times.  

That leaves Price Equity Income and Vanguard PRIMECAP funds as 
the only two funds on the list still open to new shareholders.  
Note, however, that the Vanguard PRIMECAP Fund requires a $25k 
minimum initial investment, but once you're an account holder, 
you'll benefit from the fund's low 0.50% annual expense ratio, 
the lowest of the five funds.  T. Rowe Price Equity Income has 
the second lowest expense ratio among the five funds, at 0.80%.

Conclusion

Based on the various Morningstar Fund Compare results and based 
on what I know about these five funds, I'd have to cast my vote 
for Brian Rogers, T. Rowe Price Equity Income Fund for the best 
domestic stock manager never to win Morningstar's annual honors.  
You could make a strong case, however, for Sam Stewart, Wasatch 
Core Growth Fund.  Considering his fund is closed, we prefer to 
cast our vote for a fund that people can still invest in.

Brian Rogers is the only manager the T. Rowe Price Equity Income 
Fund has known and goes back to 1985.  According to Morningstar, 
the fund's "calling cards" are low price tags and above-average 
yield.  It seeks out "under-appreciated" gems, Morningstar says, 
where management has a good chance to turn things around.  That 
strategy has paid off over time for investors, generating "high" 
return with "below average" relative risk.  For more information 
or to download a fund prospectus, log on to www.troweprice.com.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


**************************************************************
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**************************************************************

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are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
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for it. 

Click here for the full details:  

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**************************************************************


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

Out of Steam?

Was that consolidation we saw? Or maybe a right shoulder? Maybe 
just a minor pullback to a higher level of support. For now, let's 
look at what we did get.


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The Option Investor Newsletter                  Tuesday 01-07-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Stock Pick: Channeling Higher
Dropped Calls: None
Dropped Puts: None
Daily Results
Call Play Updates: SYK, ACS, AU, BEAS
New Calls Plays: None
Put Play Updates: CEPH, QCOM, ASD
New Put Plays: ERTS, KSS

**********
Stock Pick
**********

Channeling Higher
BEAS – BEA Systems $13.73
Strategy: Long stock with put insurance

We added BEA Systems to our recommended call list approximately
2 weeks ago. BEA Systems, Inc is a provider of e-commerce
infrastructure software that helps companies of all sizes build
e-commerce systems. Tonight the software company headlines our
long-term stock play selection.  Speaking of headlines, a look
back at the top stories concerning BEAS this past year shows very
little negative press, which is certainly a plus, considering we
just closed the books on a year where investor confidence was
completely shattered.

BEAS received its share of upgrades and downgrades from the
analysts in recent months, but no major catastrophes in the
headlines.  That’s not to say that long-time shareholders haven’t
experienced their share of pain. The third week of October in
2000 investors were adding BEAS to their portfolio as the
software company approached the $90 level, before the bottom fell
out.

BEAS finally found a bottom this past October at $4.59.  It’s
not that we expect our new play to skyrocket back to the $90
area, but the software company has made what could be considered
a remarkable recovery in the last 3 months. There seems to have
been no single major catalyst behind the recent strength,
although many quality tech stocks have found buyers willing to
ante up in recent weeks.

While BEAS has experienced declining year over year
revenues, profits have met or exceeded estimates in the last
few quarters. Wall Street showed their approval of the company’s
performance of the most recent quarter in mid November when BEAS
reported they earned $0.07 per share, a penny ahead of consensus
estimates. The news pushed its share price through the 200-dma
near $9.60 and the bulls continued to have their way, bidding the
price up to $11.67 before taking some money off the table.
There’s a belief among many analysts and investors that BEAS’s
strong application server and the potential to become a leading
provider of platform solutions deserves a premium valuation. In
early December, IBM announced it would acquire competitor
Rational Software (NASDAQ:RATL) which could have been perceived
as a negative for BEAS. Investors did see a bit of a pullback,
but the 200-dma became support and the buyers returned.

In mid December the company reaffirmed its fourth-quarter
earnings target of $0.08 a share, which brought buyers back
to the table. At that time rumors were circulating of a
potential bid by BEAS for Borland Software Corp(NASDAQNM:BORL).
Speculation was that it would be a move to counter the IBM
deal with RATL. BEAS CEO Alfred Chuang would not comment
on the rumors, saying only “We have a long-standing relationship
with Borland and we will continue to be close partners.” While
there very well may be a consolidation in the software industry
we believe BEAS will be here for the long haul.

While BEAS has already made a nice run, there certainly appears
to be room for more. Approximately 2 weeks ago the 50-dma crossed
above the 200-dma which technically suggests a change of trend.
Some investors may prefer to jump on the bandwagon on further
strength, while others may choose to wait for a pullback and
bounce off support. In either case, a check of the volume to
confirm a move may be prudent, prior to taking a position.
Support has developed near $11.25 and $10.50, with the 50-dma
sitting back at $10.08.  There is little in the way of major
resistance until the $20-$21 area with the $28-$30 level
providing the next major hurdle.

Option 1. Purchase BEAS stock at the current level and purchase
1, June $10.00 Put(BUC-RB) for every 100 shares of stock 
purchased. If the stock is under $10.00 by June expiration, then
exercise the put and sell the stock. In the event you are still
bullish on the stock, you may consider taking whatever profit you
have from the original put and roll down, or buy another $10.00
put, six to nine months out, however, remember this strategy can
increase your breakeven level substantially.

Option 2. Consider buying a January 2004 or 2005 In-the-Money
LEAP Call, rather than purchasing the stock. As of tonight’s
close, Jan 2004(LZP-AA) & 2005(ZWKP-AA) $5.00 LEAP Calls were
priced at $9.40 and $10.00 respectively.  For those that want
added protection, the purchase of 1, June $12.50 put(BUC-RV) for
each LEAP Call purchased, could also be considered. However, be
advised, the premium paid for all the options can begin to add
up, and have a significant effect the breakeven levels of the 
position.

Option 3.  Purchase BEAS stock at the current level and wait
for the stock to move higher. Once you feel BEAS has reached
a point of consolidation or are expecting a pullback, buy 1 June
$15.00 Put(BUC-RC) or a $12.50(BUC-RV) Put for every 100 shares
of stock owned in case of a rollover from those levels. This
option provides less downside protection, but is more bullish
initially, while locking in profit at a higher level and
also letting the stock run on a breakthrough the $15.00 level.

Option 4. Purchase the stock or a LEAP Call without protection
and close out the position if it BEAS falls below support at the
$10.00 level.

BEA Systems(BEAS) Daily Chart


 


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

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


CALLS:
*****

None


PUTS:
*****

None


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

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

CALLS              Mon    Tue

ACS      54.78    1.12  -1.39  Pullback to support
AU       34.59   -1.72  -0.67  Market Gauge
BEAS     13.73    0.56   1.06  New highs
SYK      68.40   -0.70   0.25  $69 test for entry


PUTS

ASD      69.25    0.89  -1.04  Failure at $70
CEPH     50.18    1.37  -1.01  200-dma holding
ERTS     48.93   -2.40  -3.07  New, New relative lows
KSS      53.55   -0.69  -2.11  New, Retail looking bad
QCOM     37.33    1.75  -0.04  Entry below 50-dma


**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/#m
**************************************************************


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

SYK - 68.40 +0.25 (-0.28 for the week) On Friday the stage seemed 
to be set for a rally to the $70.00 area.  SYK was trading at new 
all-time highs and had displayed good relative strength.  Thus, 
one would expect that shares would continue higher on Monday when 
the broader market was experiencing a sizable rally.  However, 
this was not the case.  Shares actually finished the session with 
a small loss.  So what gives?  As far as we can tell the lack of 
participation in Monday's rally was largely a result of rotation 
into stocks that had previously been beaten down.  Contrary to 
many of the stocks that saw steep gains, SYK is in the midst of a 
multi-week uptrend.  The stock may have been due for a pullback 
after moving higher for four straight days.  But regardless of 
the reason for the decline, the relative weakness is somewhat 
worrisome.  A move to new all-time highs would help to alleviate 
these concerns.  Today's action was more promising, as SYK 
finished with a small gain after bumping off of $69.00 for the 
second time in three days.  A move above this level would provide 
an opportunity to open new long positions.  After the closing 
bell today, Stryker announced an agreement with Regeneration 
Technologies (RTIX) to provide products used in sports medicine 
surgeries.  We don't expect this news to have any material impact 
on how SYK trades tomorrow morning.

---

ACS $54.78 -1.39 (-0.03) While the broad markets held onto the
bulk of their Monday gains today, the same can't be said about
our ACS play.  The effects of the RBC upgrade faded from fickle
investors' minds this morning and the stock fell sharply at the
open before catching a weak bounce from the $54.75 level.  That
bounce faded into the close, so that the stock ended just a few
pennies above the low of the day.  So much for a continuation
of that breakout move.  But after the strong rally of the prior
three days, ACS was due for a bit of profit taking -- the
problem is that it came on heavy volume, just like yesterday's
rally up above $56.  In fact the selling volume today was
actually a bit heavier than yesterday's buying volume, and after
a strong rally, that's never a good sign.  But we don't want to
read too much into a single day's trading, and will give the
play some room to breathe.  A rebound from the $53.50-54.00 area
(the site of the most recent breakout) would make for a solid
entry into the play, as there is additional support likely to
come into play at the 10-dma (currently $53.32).  A violation of
the 10-dma will likely have our $53 stop being tested in short
order, so keep those stops in place.  Traders that would prefer
to wait for more positive price action before playing can target
new entries on a push back above $55.50 (today's intraday
resistance) in anticipation of a run at the $56-57 resistance
level.  Clearly momentum traders need to wait for a rally
through $57.25 before playing.

---

AU $34.59 -0.67 (-1.22) After such a strong rise, gold was due
for a bit of a pullback, and gold shares too.  The early action
yesterday had the yellow metal trading for $357, before profit
taking set in with the broad equity markets continuing to rally.
While gold held above the $350 level at the close, weakness was
already starting to show in the gold stocks, with the XAU index
falling back near $78, after briefly testing the $81 level.  That
action continued on Tuesday, with the XAU shedding another 3.5%
to settle just above $75, but below the 20-dma for the first time
in over a month.  Despite that weakness, our AU play has actually
held its ground rather well, ending Tuesday's session right on
the 10-dma and still above the 20-dma ($33.35).  With daily
Stochastics now in full retreat and MACD looking toppy, gold
bulls need to exercise caution here.  If the bullish trend is
going to continue over the near-term, then AU ought to find
support near the $34 level, and certainly no lower than the
20-dma.  So those looking to initiate new positions will want
to enter on a rebound from that area, confirmed by a resumption
of bullish action in the XAU.  For now, we're maintaining our
stop at $33.

---

BEAS $13.72 +1.05 (+1.69) It was a long time in coming, but on
Tuesday BEAS finally broke out above resistance near the $12.65
level.  Although the stock technically pushed through that level
late on Monday, the real breakout didn't occur until this morning,
and thankfully it was accompanied by a bull's best friend, strong
volume.  By the closing bell, the stock had vaulted higher by
more than 8% on volume that was 60% above the ADV.  Not a bad
day in light of the rather anemic action in the remainder of the
broad market.  With today's breakout, we're now looking for next
major resistance near $15, and expecting the broken resistance at
$12.65 to begin acting as support on the next pullback.  A
breakout over $14 (just above today's intraday high) looks good
for entries targeting the $15 level near-term.  More patient
traders should be able to enter on a bounce from support in
anticipation of that breakout over $14.  Raise stops to $11.50.


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

None


**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/#m
**************************************************************


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

CEPH - 50.23 -0.96 (+0.58 for the week) Although the bears 
offered a spirited defense of Cephalon's 200-dma last week, 
Monday's broader market rally was more than they could handle.  
During the middle of yesterday's session it appeared as if CEPH 
might approach our stop-loss.  However, shares faded the NASDAQ 
and trended slightly lower into the close.  This morning's 
trading gave us another scare as shares traded to an intraday 
high of $51.92.  Investors may have been reacting to news that 
Cephalon had entered into a research partnership with MDS 
Proteomics (MDZ).  These gains proved to have absolutely no 
staying power.  Shares reversed course and quickly moved into 
negative territory.  A failed rally near $51.00 sent CEPH back 
down to previous resistance in the $50.00-$50.25 area.  Shares 
showed relative weakness compared to the BTK.X biotech index, 
which finished flat.  Looking at a 15-minute chart, one can see 
that CEPH has developed a tendency to sell off from its intraday 
highs.  If this trend keeps up we could soon see shares retest 
the 100-dma at $48.00.  Aggressive traders can target entry on a 
move back under $50, which is also where the 200-dma lies.  
Conservative traders may want to wait  until shares violate the 
relative low of $47.76, which would also be a break of the 100-
dma at $48.00.

---

QCOM  $ 37.31 -0.06 (+1.63 for the week) It really pays to use 
clearly-defined action points.  QCOM looked like it would 
continue to decline after setting a fresh relative low on Friday.  
Monday's powerful broader market rally, however, helped the stock 
to erase a large chunk of last week's losses.  Shares never 
approached our entry trigger at $35.38.  Interestingly, the one-
day rebound took shares towards the top of the descending 
regression channel.  This trendline, which coincides with the 50-
dma ($37.85), thwarted two intraday rallies during Tuesday's 
session.  We'd expect shares to roll over from this level if the 
NASDAQ begins to retrace its recent gains.  Today's relative 
weakness versus the semiconductor index (SOX.X) and wireless 
index (YLS.X) supports this outlook.  Although we're maintaining 
our trigger price, more speculative traders could consider the 
alternate strategy of entering short positions if shares head 
lower from current levels. Stops are still set at $38.25.

---

ASD $69.25 -1.04 (-0.23) After its month-long slide down to
support, ASD got our attention last week when it plunged below
the $70 support level, demonstrating its relative weakness by
losing more than 3% the day after the broad market advanced by
more than 3%.  Yesterday's broad-based rally gave the stock a
bit of a lift, but the weakness showed through again, as ASD
retreated from its highs just below $71 and continued to fall
on Tuesday.  By the end of the day, the stock came to rest at
its lowest level since November 13th, but not yet low enough to
generate a PnF Sell signal.  In order to accomplish that, the
bears need to push ASD down to the $69 level.  But entries on
that breakdown aren't the best way to go, with the bullish
support line resting at $68.  The better entry strategy will be
to wait for a failed rally below the $71 resistance level.  The
failed rally near that level on Monday would have made for a
solid entry, as it showed just how little buying interest exists
for the stock.  Lower stops to $72.


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

ERTS - Electronic Arts - $ 48.93 -3.07 (-5.62 for the week)

Company Description:
Electronic Arts, headquartered in Redwood City, California, is 
the world's leading interactive entertainment software company. 
Founded in 1982, Electronic Arts posted revenues of more than 
$1.7 billion for fiscal 2002. The company develops, publishes and 
distributes software worldwide for video game systems, personal 
computers and the Internet. (source: company press release)

Why We Like It:
It's been a wild couple of days for shareholders of Electronic 
Arts.  The stock rebounded with the NASDAQ late last week after 
finding buyers near $50.00.  ERTS had moved to short-term highs 
and seemed to be on course to retrace its mid-December selloff.  
Monday's explosive NASDAQ rally provided the perfect climate for 
some additional gains.  Instead, the stock posted a 4.6% loss.  
This relative weakness can be largely attributed to poor sales of 
Electronic Arts' "Sims Online" game, which was released on 
December 17th.  The Sims franchise has been one of the biggest 
moneymakers for ERTS and this particular version will have 
thousands of subscribers paying monthly fees to play in the 
game's virtual online world.  The weaker-than-expected initial 
sales data, which was released this weekend, might portend a 
bottom line disappointment for the leading videogame company.  
This point was driven home today when Goldman Sachs said that the 
firm's retail checks had been "generally below expectations."  
Goldman's analyst also said that the overall videogame industry 
might grow more slowly than expected in 2003.

These negative comments sent ERTS sharply lower in afternoon 
trading.  When all was said and done the stock had fallen to new 
52-week lows on the strongest volume in over two weeks.  The next 
level of clear support is down at the late-2001 lows near $41.00.  
The oscillators help to bolster the bearish technical picture, 
with the daily stochastics (5,3,3) reversing at the middle range 
and the MACD beginning to curl lower.  What's especially 
intriguing about today's breakdown is the fact that ERTS is now 
in danger of violating its 200-period moving average on the 
weekly chart.  This level hasn't been violated in over five 
years!  Previous pullbacks to the moving average were met with 
buying.  A move below this level could precipitate another 
downward leg.  With this in mind, we're going to place our entry 
trigger at $47.89, 18 cents below the 200-pd MA.  This will also 
ensure that ERTS has broken to new multi-year lows before we 
activate our short play.  Alternatively, traders could also 
evaluate entries on a failed rally at $50.00.  Our stop for this 
play will be placed at $51.25.  Traders using the alternate entry 
strategy could use a stop just above today's high of $52.89.

BUY PUT FEB-50*EZQ-NJ OI= 608 at $4.70 SL=2.35
BUY PUT MAR-50 EZQ-QJ OI=1707 at $5.70 SL=2.85

Average Daily Volume = 5.65 mil


---

KSS - Kohl's Corporation $53.55 -2.11 (-2.80 this week)

Company Summary:
Kohl's Corporation operates family-oriented, specialty department
stores, primarily in the Midwest.  The company's stores sell
moderately priced apparel, shoes, accessories and home products
targeted to middle-income customers shopping for their families
and homes.  Kohl's stores have fewer departments than full-line
department stores, but offer customers assortments of merchandise
displayed in complete selections of styles, colors and sizes.  Of
the 420 stores the company operates, 116 are takeover locations,
which have facilitated the entry into several new markets,
including Chicago, Illinois; Detroit, Michigan; Ohio; Boston,
Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri,
and the New York region.  

Why We Like It:
The holiday shopping season went out with a whimper and the
recent news out of the Retail sector is not encouraging for the
bulls.  Even the leading discount retail chains like Wal-Mart
had a disappointing season to close out a disappointing year.
Merrill Lynch didn't waste any time shedding the dead weight
from its Focus List on Tuesday, removing KSS and sending shares
of the stock plunging 3.8% on volume well above the ADV.  A quick
look at the KSS chart shows how weak the stock has been since
early December, having given up all of its gains since
mid-October.  Despite the recent slide, the stock looks like it
still has some substantial downside in store, at least according
to the PnF chart, which is currently on a Sell signal with a
bearish price target of $46.  Last Thursday's euphoric rally in
the broad market lifted the stock up to the 20-dma, where the
bears promptly stomped on it, and with volume on the rise, it
doesn't look like they're going to let up anytime soon.  While
we'd prefer to enter on the next failed rally (ideally in the
$55.50-56.00 range), we may not get the chance.  Traders willing
to trade a breakdown will want to target a trade under $53,
which is just below today's intraday lows.  If trading the
breakdown, make sure to confirm KSS' weakness with weakness in
the Retail sector (RLX.X), which is currently resting just above
significant support in the $255-260 area.  Place stops initially
at $56.75.

*** January contracts expire in less than two weeks ***

BUY PUT JAN-55*KSS-MK OI=5848 at $2.85 SL=1.50
BUY PUT JAN-50 KSS-MJ OI=9673 at $1.00 SL=0.50
BUY PUT FEB-50 KSS-NJ OI= 574 at $2.40 SL=1.25

Average Daily Volume = 4.06 mln



**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/#m
**************************************************************


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

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


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

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

Contact Support
The Option Investor Newsletter                  Tuesday 01-07-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: PUT - KSS
Futures Corner: Making Sure it Fits


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

KSS - Kohl's Corporation $53.55 -2.11 (-2.80 this week)

Company Summary:
Kohl's Corporation operates family-oriented, specialty department
stores, primarily in the Midwest.  The company's stores sell
moderately priced apparel, shoes, accessories and home products
targeted to middle-income customers shopping for their families
and homes.  Kohl's stores have fewer departments than full-line
department stores, but offer customers assortments of merchandise
displayed in complete selections of styles, colors and sizes.  Of
the 420 stores the company operates, 116 are takeover locations,
which have facilitated the entry into several new markets,
including Chicago, Illinois; Detroit, Michigan; Ohio; Boston,
Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri,
and the New York region.  

Why We Like It:
The holiday shopping season went out with a whimper and the
recent news out of the Retail sector is not encouraging for the
bulls.  Even the leading discount retail chains like Wal-Mart
had a disappointing season to close out a disappointing year.
Merrill Lynch didn't waste any time shedding the dead weight
from its Focus List on Tuesday, removing KSS and sending shares
of the stock plunging 3.8% on volume well above the ADV.  A quick
look at the KSS chart shows how weak the stock has been since
early December, having given up all of its gains since
mid-October.  Despite the recent slide, the stock looks like it
still has some substantial downside in store, at least according
to the PnF chart, which is currently on a Sell signal with a
bearish price target of $46.  Last Thursday's euphoric rally in
the broad market lifted the stock up to the 20-dma, where the
bears promptly stomped on it, and with volume on the rise, it
doesn't look like they're going to let up anytime soon.  While
we'd prefer to enter on the next failed rally (ideally in the
$55.50-56.00 range), we may not get the chance.  Traders willing
to trade a breakdown will want to target a trade under $53,
which is just below today's intraday lows.  If trading the
breakdown, make sure to confirm KSS' weakness with weakness in
the Retail sector (RLX.X), which is currently resting just above
significant support in the $255-260 area.  Place stops initially
at $56.75.

*** January contracts expire in less than two weeks ***

BUY PUT JAN-55*KSS-MK OI=5848 at $2.85 SL=1.50
BUY PUT JAN-50 KSS-MJ OI=9673 at $1.00 SL=0.50
BUY PUT FEB-50 KSS-NJ OI= 574 at $2.40 SL=1.25

Average Daily Volume = 4.06 mln



**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/#m
**************************************************************


**************
FUTURES CORNER
**************

Making Sure it Fits
By John Seckinger
jseckinger@OptionInvestor.com

What happens if the futures contracts rise above or below the 
calculated second resistance/support areas?  How can a trader use 
retracement analysis based on the first five minutes of trading?  

When the market trades in a tight range (example:  Friday, December 
3rd), there will be a relatively small difference between S2 and R2.  
Therefore, there is a good chance one of these outlining support and 
resistance areas will be penetrated and a trader will have to search 
for other support and resistance areas.  As already outlined, one 
solution is to use retracement levels such as 127.2%, 161.8%, 261.8%, 
etc.; however, sometimes we need to look at things a little bit more 
micro.

The retracement levels we will use are as follows:  0%, 19.1%, 38.2%, 
50%, 61.8%, 80.9%, and 100%.  If using Q-charts, go to the “Draw” tab 
and then down to “Preferences.”  Under Preferences, set the 
aforementioned retracement levels.  

Let us use Monday’s trading session as an example, since the range the 
proceeding Friday was tight and gave us R2 and S2 levels not far from 
Friday’s close.  Looking at the ES03H contract below, it was only 
roughly 40 minutes into the session when R2 was taken out.  Now what?  
Well, even without fitted retracements, we know that the market should 
continue higher and that it generally makes sense to buy dips?  Ok, but 
what levels do we use?  With that segue, one solution is to anchor the 
retracement tool on the bottom of the first five minutes of trading 
(using the bottom because the market is bidding) and then “fit” the 
first retracement level (80.9 or 19.1 percent – doesn’t matter, since 
it adds up to zero) at the top of the first period (five minute) of 
trading.  

The real question is, Does it work?  Looking at the chart below, I 
anchored the bottom retracement at 908.25 and the next retracement 
level as close to 912.50 as I could get.  Notice how a trader could 
actually take the 50% area at 918.75 and use that as the ‘new daily 
pivot’.  Interesting how this same level acted as good support on 
Tuesday.  Back to Monday’s chart, we now have a new R2 at 929, which 
did come much closer to the session’s high than the 916.50 R2 level.  
Another thing to notice is how the 61.8% area (or 38.2%, depending on 
how the retracement is drawn) actually came extremely close to Monday’s 
R2 level; therefore reinforcing the fact that our “new” retracement 
area isn’t that far off base and should be a good trading tool.  

Chart of E-mini S&P 500, 5-minute


 

Time to test the fitted retracement theory on the NQ contact during 
trading on Monday as well.  Heading into Monday, the R2 (Second 
Resistance area) came in at 1048.75 and was taken out during the same 
time frame as when the R2 for the ES contract was eclipsed.  With the 
top of the first five minutes becoming the 19.1% area, 1056.50 would be 
roughly the new pivot.  Monday’s ‘new R2’ would then move higher to 
1076.  This level was not hit until Tuesday, but I do believe the 
fitted retracements did act relatively well enough to be used in the 
future.  

Chart of E-mini Nasdaq 100, 5-minute


 

Trust me, this is not an advanced concept.  I find that retracement 
analysis works very well because a lot of short-term institutional 
traders (specialists, market makers, etc.) like to get levels that can 
be used for risk purposes in order to hedge inventory properly.  I 
wrestle with the idea that too many numbers get involved in any given 
chart.  Five-minute patterns, 60-minute “p and b” formations, daily 
retracement, etc.; however, I am comfortable using a five-minute chart 
throughout the entire day regardless of weekly or daily levels.  Sure, 
8800 was a daily level and did act as resistance; however, I still need 
to define risk during the day.  It is the weekly, daily, and 60-minute 
charts (as well as Bullish Percent charts) that hopefully makes it 
clear if a trade should be kept overnight or not.  

It really all comes down to ‘mind dissemination.’  How quickly can you 
as a trader process all these numbers and execute properly?  I think 
that it makes sense to keep things simple, but not too simple as to 
underestimate the difficulty in trading.  Retracement analysis, in my 
mind, is ‘smart’ trading.  When trading levels, as shown above in the 
NQ contract, the bias has to be bullish when R2 is taken out.  
Therefore, as a trader, look to buy just above each retracement area 
and have an objective of the next retracement level.  Stop?  Just under 
the level below.  The phrase “just under” has different meanings with 
different contract; therefore, I recommend experimenting with ways to 
avoid traps.  For the Dow, I like to use a 10-point cushion.  For both 
the ES and NQ contract, I think it depends on the particular P/L and 
possible time horizon (since it might be clear that the position will 
be kept overnight).  

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com 


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