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Daily Newsletter, Thursday, 01/09/2003

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The Option Investor Newsletter                Thursday 01-09-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Stampede!
Futures Markets: The Right Shoulder
Index Trader Wrap: (See Note)
Market Sentiment: One More Step
Weekly Manager Microscope: DAL Management Team: Fund X Upgrader 
Fund (FUNDX)


Updated on the site tonight:
Swing Trader Game Plan: Final Barrier


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      01-09-2003           High     Low     Volume Advance/Decline
DJIA     8776.18 +180.90  8787.70  8596.61 1.89 bln   2318/ 963
NASDAQ   1438.48 + 37.40  1445.09  1414.47 1.66 bln   2350/1035
S&P 100   469.92 +  9.86   470.44   460.06   Totals   4668/1998
S&P 500   927.57 + 17.64   928.31   909.93 
W5000    8755.00 +160.00  8760.47  8596.03
RUS 2000  395.94 + 41.10   396.87   389.07 
DJ TRANS 2411.79 + 41.10  2411.79  2369.79   
VIX        26.88 -  1.54    27.88    26.19   
VXN        42.99 -  1.57    45.06    41.79 
Total Volume 3,733M
Total UpVol  3,181M
Total DnVol    522M
52wk Highs  293
52wk Lows    66
TRIN       0.46
PUT/CALL    .74
************************************************************

Stampede!

Bulls broke out of the corral and stampeded up the hillside 
to supposedly greener pastures ahead. Unfortunately the heavy
diet of bearish leftovers and lack of any real exercise since
Dec-2nd has left them breathless after the three days of 
sprints in 2003. Each run has resulted in a failure to crest
the top of the hill at 8800 and the need for another nap the
next day. Will Friday be different?

Dow Chart – Daily


 

Nasdaq Chart – Daily


 

The morning started with a bang when the jobless claims fell
slightly to +389,000 for last week. This was a surprise as
many had expected the number to rise now that the holiday
distractions are over. Chalk up one for the good guys. The
continuing claims decreased by -35,000 to 3.445 million but
that number is expected to rise sharply now that they have
approved another 13 weeks of benefits to 2.3 million additional 
workers that are still unemployed. Over a million other workers 
that have been unemployed for 39 weeks already are still out 
of luck. 

The Wholesale Trade numbers also surprised analysts with a
+1.2% gain and a gain in inventories of +0.2%. This pushed
the inventory-to-sales ratio to a record low of 1.21. The
jump in sales and inventories suggested on the surface that
there was a glimmer of hope at the end of the tunnel. The
majority of the gains were autos again and we know what the
future holds for them. These were the numbers for November
and may not be a good indication of the current situation. 
We have heard several tech companies say they have not seen
any increase in capital spending with EMC and SAP being the
exceptions. The record low inventory to sales levels will
provide a very big boost to the recovery once it starts. 
There will be strong buying to replenish those levels once
demand is seen again. 

Retail Sales for December rose only +1.0% and was the worst
gain for the period since 1970. This report came only two
days after the same research firm raised estimates to 2.0%
for the period. Evidently they lost a few fractions between
estimates and final. Weakness was chalked up to serious 
discounting, lower inventory levels, strikes, snipers, 
weather, gasoline prices and unemployment. However, despite
the negative news investors celebrated. It appears the 
outlook was for a much worse holiday season. (Worst in 32 
years was not enough?) Several stores reported same store 
sales and WMT gained +2.3% with TGT showing only a slight 
decline and FD losing -2.6%. Still FD gained +1.71 on the 
news. Will wonders never cease? Worst year in 32 years BUT 
it could have been worse. Let's buy! (grin) The reality is
that investors felt this should be a bottom for retailers
with the 2H-2003 recovery in our future. (Yes, somebody is
counting eggs instead of chickens.) 

There were several other positive news events today. SAP
said they were going to raise guidance due to stronger than
expected sales in the fourth quarter. This gave techs a boost
since their expectations had been for a decline in SAP sales.
The tech gain was surprising since the gain in SAP sale was
only "slight". On the whole there appeared to be many more
warnings/downgrades than raised guidance/upgrades but traders
already had their mind made up. These were some of the changes
today.

Warnings: WTSLA, PSS, OO, TOO, FD, EMN, CPWR, KSS, TGT, DG, 
BJ, CTR, MHO, SKS, WYE, SHLM, ICPT, AOL, CAKE, LXK, ASH, SGP,
BGP, HUF, FINL, TOY.

Raised guidance: BBY, SAP, AZN, BWS, ROST, INVX, MRVC, ALO, 
RPM, ROK.

What captured investors attention this morning were statements
out of the UN that they have not found any smoking gun. There
were several news conferences about the lack of progress and
the bottom line appeared to be that the potential war could
be setback as far as Nov/Dec. This easing war deadline made
traders more confident that it may not happen at all. The
"deadline" for the formal report on Jan-27th has turned into
a status check instead. Almost everyone now expects that the
inspectors will request much more time and the US will be 
forced to cool its heels. There was another order issued to 
the Marines today which prohibits any Marine from leaving the
service for the next 12 months. B2 bombers were ordered to 
leave from Idaho to staging areas closer to the battlefield. 
There are about 200,000 troops either in theater or moving
into position with another 50,000 expected to be called up. 

Key dates in our future are the State of the Union speech on
Jan-28th (just a coincidence that it is a day after the prior
Jan-27th deadline, right?) and the Muslim holy weeks. Two 
million Muslim pilgrims will be traveling to Saudi Arabia
performing the Hajj by the first week of February. The end
of this event is the Adha celebration which takes place
on Feb-14th. It is generally accepted that the US would not
start the war until after this period. This allows them to 
give the UN inspectors another 30 days but any further delay
would put the effort off until the next winter due to the
very hot summer conditions. 

Another positive event was promising words out of North Korea. 
It appears the rush to make nuclear bombs has slowed as pressure
was brought to bear from their neighbors. The NK ambassador
is meeting in the US to discuss potential resolutions. 

Suddenly the world appears closer to continued peace and 
fewer unemployed. This could be a temporary situation but
it did cause shorts in the market to cover in panic for 
the third time this short year. The markets are VERY skittish 
and there is no confirmation in either direction as evidenced
by the alternating triple digit days. The markets want to 
go up based on the expectations that the Bush stimulus, 
added to the already flood of Fed stimulus, will simply 
over power the economic sluggishness. Traders are tired 
of fighting losses for the last three years and are ready 
to invest regardless of the conditions. 

This positive sentiment flattened the VIX to a six-month
low of 26.19 today. The TRIN also fell to a very overbought
level of .35 around noon. While the VIX at 26 is far from
historic levels is in an indication that there is no fear
in the markets. Almost everybody is bullish, which in itself 
is a bad sign. The Dow closed just below strong resistance 
at 8800 once again. This is the 3rd time since Jan-2nd that 
the Dow has come within 20 points of that 8800 level. On a 
normal day this would be a setup for failure. 

Tomorrow the bears could be caught flat-footed again. The 
Jobs report for December will be released on Friday at 8:30 
AM. Last months number showed a loss of -40,000 jobs. The
forecast for December is for a gain of +32,000 jobs. If that
jobs number is exceeded the bullish sentiment could explode
and the bears could be looking at an opening well over 8800. 
Conversely, if the number is negative we could see the same
result as the retail sales as traders look forward to a
future without war. I realize this is a stretch for some
readers, it is for me, but instead of trading what we think
we need to trade what we see. A break over 8800 would cause
another serious round of short covering and would put Dow
9000 clearly in our sights once again. 

There was a material change in our technicals today. The 
Nasdaq closed over its 200 DMA at 1435 by 3 points. Granted
that is not much but it did seem to gravitate and stick to 
that average all afternoon. Any further move over it would
prompt serious short covering. It appears we could be set 
up for a big move at the open in either direction depending
on the Jobs report and any news events. According to Yahoo
there are only seven companies who report earnings on Friday
so any flurry of stock news could be warnings. It should be 
interesting!

There are only 4 days left to take advantage of the end of
year subscription special. 

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


**********************
Annual Renewal Special - only 4 days left !
**********************

There are only four days left to subscribe with the annual special!
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
***************

The Right Shoulder
By John Seckinger

After Friday’s non-farm report, traders should get a better 
indication regarding the possible right shoulder in a daily Head 
and Shoulders formation.  Fasten your seat belts. 

Thursday, January 9th at 4:15 P.M. 

Contract      Last    Net Change     High        Low       Volume    

Dow Jones    8776.18   +180.87      8787.70    8596.61
YM03H        8742.00   +159.00      8774.00    8575.00     22,673
Nasdaq-100   1076.05   +33.53      1084.70     1056.05     
NQ03H        1077.00   +32.00      1088.00     1044.50    262,323
S&P 500       927.57   +17.64       928.31      909.93
ES03H         924.75   +14.25       928.50      907.25    642,338

Contract         R2         R1       Pivot       S1         S2    

Dow Jones      8911.25    8843.71   8720.16    8652.62    8529.07
YM03H          8896.00    8819.00   8697.00    8620.00    8498.00
Nasdaq-100     1100.92    1088.49   1072.27    1059.84    1043.62
NQ03H          1113.33    1095.16   1069.83    1051.66    1026.33
S&P 500         940.32     933.95    921.94     915.57     903.56
ES03H           941.42     933.09    920.17     911.84     898.92

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

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

The March Mini-sized Dow Contract (YM03H)

The YM contract took out its pivot early on Thursday, and soon 
afterwards tested the 8700 level and above.  Looking at a daily 
chart below, the contract moved above both its 50% and 61.8% 
retracement level (8714).  The objective above, based on these 
retracements, is for a move to 8866.  R2 comes in at 8896.  It is 
important to note that the bullish percent given for the Dow is 
in a column of X’s and should mean that traders will be looking 
to buy dips on Friday.  Where?  Most likely S1, but it is 
important to monitor things during the day to see what 
retracement areas are holding or failing.  I did a article in the 
Investor Education sector tonight on how confirmation can be 
established.  Note:  I do know my right from left, but was 
somehow confused when doing the chart.  

Chart of Mini-sized Dow Contract, Daily


 

Just like following Wednesday’s session, I still have a feeling 
of a range trade with a slight bullish bias.  If R1 at 8819 is 
taken out (matches up well with the top end of the Bollinger 
Band), I think longs will get aggressive.  Why buy a move higher?  
I think 8819 could reject the possibility of a H&S formation and 
attract longs.  Looking at the chart below, there is quite a 
range between R2 and S2.  If aggressive, using fitted 
retracements can be a solution.  An article on fitted 
retracements can be found here:

http://www.OptionInvestor.com/futurescorner/fc_010703_1.asp 

Chart of YM03H, 120-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.  On Wednesday, the 
indicator was unchanged.  

The March E-mini Nasdaq 100 Contract (NQ03H)

On Thursday, the NQ contract closed above its calculated pivot 
for Friday.  Bullish, but it all comes down to the open and 
making sure the contract opens up above this pivot.  An open 
under this pivot should be viewed as a short-term failure.  With 
the contract above the 1042 area, I think bulls will be looking 
to buy possible weakness after the non-farm report.  If the 
report is strong, look for strength above the 1100 area.  Playing 
levels on a neutral report works as well, but then it should be 
more responsive in nature: pivot as support and then resistance 
at both 1089 and near 1100.  The only short opportunity I see on 
weakness would be a move (or open) under the pivot with an 
expectation for a move to S1 at 1051.  A close under S2 would 
probably indicate taking a short overnight, while a close above 
1100 would be viewed as an intermediate bullish signal.  Any 
close in-between becomes speculative in nature.  

Chart of NQ03H, 120-minute


 

Bullish Percent for NDX:  64% (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 rise on Thursday.  If the 
indicator can get to 66%, there will be a column of X’s and it 
should shift risk more towards selling the contract.   

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

I was going to put in a daily chart of the ES contract, but it 
showed all the same characteristics as the YM contract.  On the 
high end of its Bollinger Band, and exactly the same look as it 
relates to the retracement levels from December’s decline.  
Looking at a 120-minute chart of the ES, being above 910 and the 
50% retracement area (left side of chart) does have bullish 
implications.  However, there is a chance a weaker opening under 
the 920 pivot could take the contract down to 911 and S1.  This 
is very close to 910, and should be a solid retracement area 
going forward.  On the upside, a move above R1 at 933 should have 
short-term bullish implications and look for a move to 941 before 
bulls take a breather.  Note:  S2 is under 900 at the 898.92 
area.  A close underneath here would be devastating.  On the 
other hand, a close above 941 would be a significant breakout.

Chart of ES03H, 120-minute


 

Bullish Percent of SPX:  61.12% (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, Monday’s, or Thursday’s rally.  

Good Luck.

Questions are welcomed,

John Seckinger


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

Check the Site Later Tonight For Jeff’s Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/010903_1.asp


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

One More Step
by Steven Price

That big sell-off to support in the Dow, SPX and COMP appears as 
though it may have just been a pullback on the road to higher 
ground.  That being said, we are still fighting heavy resistance 
and market direction is getting harder to predict.   What many 
traders thought were ticking time bombs ended up fizzling out as 
news from the retail sector and General Motors was not as bad as 
expected.  Good news from German software maker SAP also helped 
the techs, as the company raised guidance on stronger than 
anticipated software license revenues. It was enough to erase 
of yesterday's drop, giving the impression that the January 
effect remains strong.  

The initial jobless claims report released this morning showed a 
drop of 19,000 claims last week, pushing the four-week average 
down to just above the 400,000 level that economists generally 
regard as a sign of an improving or worsening employment picture. 
The average still remains at 406,000, but it is headed in the 
right direction. We are still quite a ways from the 350,00 level 
that signals an expanding labor market, but now that we are past 
the holidays, there may be hope that companies which had 
previously put off hiring until after the New Year may once again 
begin hiring.  Of course that knife cuts both ways with companies 
that held back on layoffs until after Christmas.  In any case, 
the first claims number of the year shows a shift toward the 
former. 

General Motors released its 2003 earnings estimates, which came 
in higher than expected.  The market got the jitters yesterday, 
as rumors about GM lowering the expected return on their pension 
fund circulated and created worries that the write-down would 
affect the company's bottom line. The company did reduce its 
expected return from 10% to 9%. The pension plan was underfunded 
by $19.2 billion at the end of 2002. While the company did say 
its pension liabilities will increase from $1 billion in 2002 to 
$3 billion in 2003, it also said it will earn $5 per share in 
2003, ahead of consensus estimates of $4.82 per share.  The 
underfunding was not as bad as expected and the guidance for 2003 
was enough to bring investors back into the stock, which gained     
$1.29 to close at $39.50.  

The news from SAP sent the Nasdaq up 37.38 points, making up      
of Wednesday's loss and closing above its 200-dma of 1435.89, at 
1438.46.  This is the first close over the 200-dma since March.   
That 200-dma put a lid on the November/December rally, as well as 
Monday's big run.  Wednesday's sell-off, however, found support 
at the 50-dma of 1394.  With the 50-dma ascending support and the 
200-dma descending resistance, a breakout beyond these averages 
could be significant and give us a directional clue for at least 
the short term.  Fellow software makers also benefited from the 
SAP news, as the sector index (GSO.X) rallied almost 5% to 
115.15, breaking back over Monday's high of 113.92 and setting 
its sights on the December 2 rally high of 121.58.

A look at the point and figure chart shows a reversal down 
yesterday in the Dow, SPX and OEX from a column of "X" to a 
column of "O."  We got the opposite action today, with a reversal 
back into the column of "X."  This looks bullish as we pulled 
back following a big run, then found support and reversed higher. 
We also saw a reversal up in the Dow bullish percent and it 
appears the tide may be turning.  However, we are also trading 
right up against significant horizontal resistance on the daily 
chart at Dow 8800.  We failed there on Monday and Tuesday and 
today's rally ended just short once again. It appears it will be 
a hard fought battle at that level. Right now the bears are 
winning, but the bulls continue to hit that door with the 
battering ram and I'm not sure how much longer it will hold.  Of 
course, we saw similar action just a week ago as we tested the 
downside at 8200-8300.

Why the big change?  The President's tax plan was the impetus 
that got us rolling as investors rushed for dividend paying 
stocks.  Today's announcement by the U.N. weapons inspectors that 
they found no smoking gun in Iraq also appears to have delayed 
the specter of war. For now it certainly appears as though we are 
headed higher after bouncing on the pullback.  A decisive move 
over Dow 8800 would indicate a re-test of December highs over 
9000 in the near future.  Traders can keep an eye on that level 
to either get long with a tight stop, or at least get out of the 
way if shorting resistance.

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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  8776

Moving Averages:
(Simple)

 10-dma: 8547
 50-dma: 8575
200-dma: 8941



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  927

Moving Averages:
(Simple)

 10-dma:  902
 50-dma:  904
200-dma:  951



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1076

Moving Averages:
(Simple)

 10-dma: 1029
 50-dma: 1041
200-dma: 1064



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

The Software Index (GSO.X):  The Software Index raced to new 
relative highs today following increased guidance from German 
Software firm SAP.  SAP said it saw higher licensing revenue than 
anticipated, giving the techs something to cheer about across the 
board. After blowing through its 200-dma on Tuesday, the GSO 
pulled back to support above that level on Wednesday's market 
drop.  It is impressive that the group held that support level 
after the breakthrough and today's new high suggests it may make 
a run at the December high of 121.58.  Microsoft is encountering 
resistance $56, but traders can look for a move through that 
resistance as a signal to look for other longs in the sector as 
well.  As the GSO approaches 120, however, be ready to tighten 
stops in case of a pullback.

52-week High: 204
52-week Low : 77
Current     : 115

Moving Averages:
(Simple)

 10-dma: 108
 50-dma: 118
200-dma: 264


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

Market Volatility

The VIX dropped back toward 26 once again on today's broad market 
rally. It continues to flirt with support at that level on 
rallies, and signal market pullbacks each time.  However, if we 
continue higher above Dow 8800 on a closing basis, we may finally 
see that support give way and the VIX drop to its lowest levels 
since June. With the market still trading in wide daily ranges 
and the VIX headed toward relative lows, traders who are adept at 
scalping positions against long options may want to consider 
straddle purchases.  These involve the purchase of both a call 
and a put at the same strike and then buying dips in the 
underlying and selling rallies.  This strategy favors choppy 
market movement, with the option holder keeping his option as 1:1 
or 1:0.5 protection against the purchases and sales in the 
underlying instrument.  The Dow Diamonds or Spiders (SPY) are a 
possible candidate for long straddles to scalp the current market 
action.


CBOE Market Volatility Index (VIX) = 26.71 –1.71
Nasdaq-100 Volatility Index  (VXN) = 42.99 –1.57

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.74        588,307       435,811
Equity Only    0.52        450,368       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    64      + 2     Bear Alert
Dow Indust.   57      + 7     Bull Confirmed
S&P 500       62      + 1     Bull Correction
S&P 100       59      + 0     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  1.01
10-Day Arms Index  1.23
21-Day Arms Index  1.27
55-Day Arms Index  1.23


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       2127           766
NASDAQ     2253           952

        New Highs      New Lows
NYSE        148              28
NASDAQ      114              31

        Volume (in millions)
NYSE       1,865
NASDAQ     1,662


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

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 MANAGER MICROSCOPE
*************************

DAL Management Team: Fund X Upgrader Fund (FUNDX)

This week's Manager Microscope looks at DAL Investment Company of 
San Francisco, California, which serves as investment advisor for 
the Fund X Upgrader Fund (FUNDX), a "fund of funds" that buys no-
load mutual funds that rank highly in their scoring system.  This 
fund replicates the investment style used by the firm in managing 
its separate accounts, which have a minimum initial investment of 
$1 million.  

In addition to providing investment management services, DAL also 
publishes a mutual fund rating newsletter named the NoLoad Fund*X 
Newsletter.  The service is described as an effective and easy to 
use system for investors to identify the best-performing, no-load 
mutual funds.  Their disciplined strategy known as "Upgrading" is 
designed to tell subscribers what funds to buy as well as when to 
sell.

The NoLoad Fund*X Newsletter was first published in 1976, and has 
been recognized for its consistently high rankings for actual and 
risk-adjusted returns.

The Fund X Upgrader Fund (FUNDX) was launched on November 1, 2001 
and is geared to the retail market.  The fund requires a minimum 
initial investment of $10,000 for regular accounts and $2,000 for 
IRAs, and is offered on a no-load, no-transaction fee (NTF) basis 
through Charles Schwab and other leading brokerage fund networks.  

DAL maintains two Web sites: one for the investment firm located 
at www.dal-investment.com, and a companion site for their mutual 
fund (www.fundx.com).

Investment Style/Strategy

According to the DAL Investment Company website, upgrading is a 
systematic investing methodology, which involves buying no-load 
mutual funds ranked highly in their scoring system, and holding 
those funds as long as they continue to outperform their peers. 
When mutual fund holdings slip in their rankings, DAL sells them 
and moves on to the new current winners.

DAL's upgrading methodology was developed over 30 years ago and 
has been used since in the management of their separate account 
portfolios.  It is based on the concept that few money managers 
consistently excel since each money manager has a certain style 
that works well in some, but not all, market environments.  The 
market rotates, so it makes sense to continuously "upgrade" the 
portfolio in response to changing markets by selling the lowest 
ranked funds and reinvesting assets in the new leaders, as they 
call them.

I find this fund product appealing since it offers a continuous 
process that investors can use to participate successfully in a 
wide range of investment opportunities "as they develop."  This 
means the mutual fund may shift between large-cap and small-cap 
stocks, growth and value styles of investing, and international 
and domestic securities.  The strategy seeks to capture the top 
money managers when they are at the "peak of their game."  This 
continuous rotation is something you should be comfortable with 
since it will likely result in "style drift."  Accordingly, the 
fund may best serve a "supporting" role in your long-term plan.

NoLoad Fund*X uses a proprietary screening system to classify 
funds according to risk, based principally on their historical 
performance, with special emphasis on their "downside" records.  
DAL's investment management team then scores and ranks the funds 
using quantitative screens, based on 1-month, 3-month, 6-month, 
and 12-month total returns.  DAL categorizes stock mutual funds 
by risk as follows: 

 Class 1, Most Speculative
 Class 2, Speculative
 Class 3, Higher Quality Growth
 Class 4, Total Return funds 

So far we've talked about the firm's investment style, which is 
used in the Fund X Upgrader Fund (FUNDX).  In the next section, 
we provide some background on the members of the DAL investment 
management team.

Investment Management Team

The DAL investment team consists of six members led by President 
and Portfolio Manager Janet M. Brown.  She is Managing Editor of 
NoLoad Fund*X, and has worked for DAL since 1978.  According to 
her biography, Ms. Brown has been researching mutual funds and 
developing successful fund investment strategies for many years.  
Before joining DAL, she worked in Brussels for a major financial 
services company, specializing in mutual funds.

Burton "Burt" Berry is the Chairman of DAL Investment Company, a 
registered investment advisor since 1969.  He founded DAL and is 
a pioneer of the use of no-load funds.  Berry received his BA in 
Business from Stanford University, and served as a B-17 pilot in 
the U.S. Air Force during WWII, before embarking on his business 
career.  Below is a picture of the DAL investment team.




 

From Left to Right

Burton Berry (1)
Sean McKeon
Martin R. DeVault
Janet M. Brown (2) 
Bernard W. Burke
Robert H. Enslow

(1) Chairman
(2) President 


Sean McKeon is a Portfolio Manager with DAL.  His bio states that 
he received his BA from Rutgers University in 1981, then moved to 
San Francisco in 1986, where he served as a broker with a leading 
securities firm, dealing primarily with mutual funds.  He has his 
MBA in Finance from San Francisco State University.

Martin R. "Marty" DeVault is a Portfolio Manager with DAL and was 
editor and publisher of The Mutual Fund Journal.  He spent twenty 
years in academic research at the University of California, Davis 
and holds a certificate in financial planning.  DeVault graduated 
from Colorado State University with a BS in microbiology, his bio 
reads.  Before joining DAL, he worked at one of the larger mutual 
fund and financial services companies in the industry.

Bernard W. "Bernie" Burke serves as a Portfolio Manager with DAL, 
and is a native San Franciscan.  His experience in the securities 
and investment business spans some 35 years according to his bio. 
Burke holds a BA degree in Economics from Stanford University and 
is a member of the San Francisco Society of Security Analysts and 
the Association of Investment and Management Research ("AIMR").

Robert H. Enslow, a Principal of the firm, brings his many years 
of investment experience to the firm also.  He holds a BA degree 
in Economics and Philosophy and a MBA degree from the University 
of Washington.  Before joining DAL, Enslow held senior positions 
at Chase Manhattan Bank, The Bechtel Group, and Dumas West & Co., 
based in London.  His bio reads that while at Bechtel, he served 
as the Investment Manager of their $1.3 billion retirement fund. 
He also served two years as the Director of the Office of Foreign 
Direct Investments in the U.S. Government.

Investment Performance

Compared with the stock market as measured by the S&P 500 index, 
the Fund X Upgrader Fund (FUNDX) has performed well in its brief 
history.  Over the last 12 months, the fund is down 13.7 percent, 
6.3 percent better than the S&P 500 index.  Because equity style 
may drift in this fund, category rankings may be less meaningful.  
For example, Morningstar shows the fund's 1-year performance was 
ranked in the 65th percentile of the mid-cap value category, but 
Lipper puts it in the "multi-cap core" category, so comparisons 
to mid-cap value funds may or may not be appropriate.  As fund 
holdings change, so likely will its "style box" classification.

The DAL Investment Company website provides composite investment 
performance for its separately managed accounts through March 31, 
2002.  That shows the strategy's long-term investment results in 
relation to the Wilshire 5000 index, the broadest measure of U.S. 
stocks.  Below is a summary of the firm's aggregated performance 
for the equity portion of their managed accounts.  Note that the 
returns are time-weighted, and include all portfolios managed in 
those periods, combining performance on aggressive accounts with 
conservative accounts.  Also, note that returns are shown before 
deduction of management fees, but are net of any other expenses.

 Annualized 3-Year Returns:
 + 7.6% All DAL Equity Portfolios 
 - 1.5% Wilshire 5000 Index

 Annualized 5-Year Returns:
 +14.8% All DAL Equity Portfolios
 + 9.8% Wilshire 5000 Index

Though these performance figures are now a little old, over the 
last three to five years you can see that DAL's performance has 
been superior to that of the broad U.S. equity market (Wilshire 
5000 index).  The mutual fund's 1-year return advantage to the 
S&P 500 index gives you the sense that it will hold true to the 
firm's successful "upgrading" investment strategy.

Conclusion

Selecting from thousands of mutual funds is a daunting task for 
many investors, no doubt.  The Fund X Upgrader Fund is one fund 
of funds that may be worth further consideration, especially in 
light of the firm's long-term investment record in its separate 
account management business.  Combined, the six members have in 
excess of a century's worth of investment management experience 
and come from diverse financial backgrounds.      

Style purists may find the fund less appealing, since it sticks 
with its winners as long as they outperform their peers.  Since 
different styles outperform at different times, the fund likely 
will bounce around in terms of its style classification, making 
fund comparisons more difficult.  In this case, you may want to 
simply compare the fund against the Wilshire 5000 "total market" 
index as DAL does.

Still, there is a lot to like about this fund.  It has seasoned 
management at the reins and follows a unique upgrading approach 
that has been applied to the management of institutional assets 
for many years.  Trailing 3-year and 5-year performance results 
for its separate-accounts composite are encouraging, as are the 
mutual fund results over the past year, essentially its history.

Long-term investors who want to invest in equity funds, but want 
to leave the selection decision to investment professionals have 
an interesting choice here.  

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.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
**************************************************************


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

Final Barrier

Last man standing. That's the phrase that kept running through my 
head as previous support and resistance levels fell by the 
wayside, leaving just onelevel of resistance still in tact.


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


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The Option Investor Newsletter                 Thursday 01-09-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: AU
Dropped Puts: QCOM, KSS
Daily Results
Call Play Updates: SYK, ACS, BEAS
New Calls Plays: LTR
Put Play Updates: ERTS, CEPH, ASD
New Put Plays: TDS, PG


****************
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:
*****

AU $34.95 -0.55 (-0.86) After the strong run in December, we
expected a bit of profit taking in both the price of the yellow
metal and the gold stocks and we weren't disappointed.
Unfortunately, it looks like we could be seeing the start of a
more significant decline in shares of AU.  While gold has
remained above $350, AU has drifted under the $35 level and
yesterday's lower intraday high should be a warning to the
bulls.  Rather than expose ourselves to undue risk with the
rest of the market apparently in rally mode, we're pulling the
plug tonight.  Another rally failure below the $35.50 level
would be a good point to exit open positions, while more patient
traders can hold on with stops set at $34.  But we wouldn't
advocate new positions at this point.


PUTS:
*****

QCOM $38.68 +2.06 (+2.98 for the week) Anyone who was short tech 
stocks today will tell you it was a tough day to be a bear.  The 
2.6% NASDAQ gain was largely driven by gains in both the YLS.X 
wireless index and SOX.X semiconductor index, with the former 
tacking on more than 6.2%.  One of the primary reasons for our 
negative bias on QCOM was its inability to rally with these 
indices.  Today's trading action bucked that trend.  The stock 
gained 5.6%, sliced through the 50-dma ($37.92), and moved to a 
new short-term high.  We'd been looking for the 50-dma to provide 
resistance after QCOM rallied off its relative lows earlier this 
week.  With shares finishing well above this level on Thursday, 
it looks like the bears are clearly on the defensive.  However, 
it's interesting to see that the stock hasn't broken its trend of 
lower highs.  We've drawn a trendline on our daily chart 
connecting the highs from December 11th, 17th, and 26th.  Today's 
rally came to a halt just below this level.  That's potentially 
good news for shorts.  But for the purposes of this play, we're 
unwilling to wait for the stock to reverse course and move back 
towards our entry trigger at $35.38.  Although we're dropping the 
play tonight, traders might want to keep an eye out for an 
eventual breakdown below last week's lows.  

---

KSS $57.35 +4.45 (+1.00) Talk about your news-driven headfake!
KSS was looking good yesterday afternoon, having broken below
the $53 support level at the close.  Positive chain store sales
results (+3.3%) from the company this morning seemed to carry
more weight than the company's stated expectations of coming in
near the lower end of previously announced guidance and KSS
gapped up above $54 and never really looked back.  By the closing
bell, the stock had gained more than 8% and had solidly broken
through our stop on volume will over double the ADV.  Any open
positions should have been closed when the stop at $56.75 was
violated.


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

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

CALLS              Mon    Tue    Wed   Thu  Week

ACS      54.87    1.12  -1.39  –0.87  1.14  Bounce from trend 
AU       34.95   -1.72  -0.67   0.84 –0.55  Drop, not glittering
BEAS     13.69    0.56   1.06  -0.60  0.85  Fighting $14
LTR      47.54    0.52  -0.42   0.07  1.27  New, Relative high
SYK      68.65   -0.70   0.25  -0.98  1.23  Entry over $69


PUTS

ASD      69.90    0.89  -1.04  -0.40  0.95 Failed under $70
CEPH     50.00    1.37  -1.01  -1.19  1.10 Lower high
ERTS     50.76   -2.40  -3.07  -0.87  1.33 Inside days
KSS      57.35   -0.69  -2.11   2.85  4.45  Drop, Retail Quandary
PG       85.78    0.74  –0.58  -1.20  0.58  New, No Participation
QCOM     38.68    1.75  -0.04   1.41  2.06  Drop, Stopped
TDS      43.73    0.38  -0.03  -1.98 –0.79  New, Bearish to $30


**************************************************************
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  $68.65: +1.23 (-0.03 for the week) With no fresh news for 
SYK, shares have been left at the whim of the broader market.  
The stock moved nicely higher today as the bulls keyed in a 
triple-digit rally in the Dow Industrials.  Shares closed near 
the highs of the day and moved back towards resistance at $69.00.  
More upside action in the equity market tomorrow could be just 
what the bulls need to clear this hurdle.  Yesterday's pullback 
in the stock bounced from an ascending trend line, connecting the 
lows of each pullback from early December.  Ideally, we'd like to 
see a rally to all-time highs be accompanied by an uptick in 
volume, which has been drying up over the past week.  Large 
volume behind a breakout would indicate a large amount of 
conviction on the part of the bulls.  New entries can be 
considered on a move above $69.00.  Very conservative traders may 
want to place their stops slightly under yesterday's low of 
$67.25.  Our stop remains set at $65.00.

---

ACS $54.87 +1.14 (+0.06) While ACS has been good to us, with its
breakout and then consolidation above the $54 level, but its
starting to look like the stock may be running out of steam.
Yesterday's close back under the $54 level was a bit
disconcerting, but once again support came in at the 10-dma
(currently $53.82) and the stock rebounded nicely on Thursday.
If this latest bounce is going to translate into another breakout
move, we're going to need to see stronger volume to support it.
The two important levels of support are the 10-dma and the
ascending trendline at $53 (which just happens to be the site of
our stop).  An intraday dip and rebound from either of these
levels is still viable for new entries, but we need to see the
conviction of strong volume to confirm buying interest.  The PnF
chart is still quite bullish, with its price target of $91, but
it may take some time to get there.  We'll stick with our stop at
$53 in case the recent profit taking intensifies enough to break
below recent support.

---

BEAS $13.69 +0.85 (+1.66) If you feel like you've been watching a
tennis match with the back and forth action in shares of BEAS this
week, you aren't alone.  Tuesday's breakout over the $12.65 level
pulled in strong buying volume, only to see almost all of those
gains wiped out during yesterday's session of selling.  Following
several positive economic and earnings-related news items this
morning, the bulls were back on the prowl, once again driving
BEAS up near the $14 resistance level on strong volume.  It looks
like prior resistance has now become support and another
successful test of that level would make for a solid entry point
into the play.  If the consistent testing of the $14 resistance
level is any indication though, a breakout move may be the next
likely entry point.  So long as it comes on continued strong
volume, a breakout above $14 can be used for initiating new
momentum-based entries.  Raise stops to $12.25, just below
yesterday's intraday low.


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

LTR – Loews Corp. $47.54 +1.27 (+1.24 this week)

Company Summary:
Loews Corporation is a holding company with subsidiaries engaged
in property, casualty and life insurance (CNA Financial
Corporation); the production and sale of cigarettes (Lorillard,
Inc.); the operation of hotels (Loews Hotels Holding
Corporation); the operation of offshore oil and gas drilling
rigs (Diamond Offshore Drilling), and the distribution and sale
of watches and clocks (Bulova Corporation).

Why We Like It:
Regardless of the business area in which a company operates, it
is certainly hard to argue with a nearly 2 month rise in its share
price with out so much as even a mild pullback.  Such is the case
with LTR, as it has gradually worked its way up from the $38 level
in the middle of November to today's closing high above $47.50.
Throughout that period of time, MACD has been on a consistent
bullish rise and daily Stochastics haven't gotten anywhere near
oversold territory.  A quick glance at the PnF chart, shows
another Buy signal with the trade at $46, and the current vertical
count grows to $66 with today's move above the $47 level.  In a
Barron's article just over a week ago, the head of Pzena
Investment Management called LTR a 'no-brainer' due to the fact
it was trading at a steep discount to its $70 Net Asset Value,
and judging by the nearly $3 rise since those comments, apparently
investors agree.  There is a fly in the ointment though, as
Moody's downgraded the company's senior unsecured debt rating
tonight after the close to A3 from A2, largely due to the fact
that the parent company is having to funnel more cash from other
operations to its CNA Financial Corporation insurance subsidiary.
This downgrade may be just what we need to get an attractive
entry into the play, which would occur with a dip and rebound
from the vicinity of $45.50-46.00 area.  Today's close at $47.54
was just one penny below the top of the September 20th gap down,
so a pullback from current levels is likely anyways.  If buying
a breakout is more to your liking, then wait for the stock to
push through $48 before playing, keeping in mind additional
resistance waits first at $49 and then the 200-dma at $49.53.
Place stops initially at $45.

*** January contracts expire next week ***

BUY CALL JAN-45 LTR-AI OI=264 at $2.85 SL=1.50
BUY CALL FEB-45 LTR-BI OI= 39 at $3.80 SL=2.25
BUY CALL FEB-50 LTR-BJ OI= 51 at $1.05 SL=0.50
BUY CALL MAR-50*LTR-CJ OI=515 at $1.60 SL=0.75

Average Daily Volume = 563 K



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

ERTS $50.77 +1.34 (-3.78 for the week)  You'll recall from 
Tuesday's description of this play that speculation of weak 
videogame sales had helped to push ERTS to 52-week lows.  
Specifically, the stock had been pressured by analyst 
expectations for weak sales of Electronic Arts' "Sims Online" 
game.  As it turns out these forecasts were a little premature.  
Speaking at a Morgan Stanley conference, the company's CEO said 
that the game had sold 90,000 units in its first three weeks, 
greater than expectations.  The recent round of negative analyst 
comments were based on initial figures from the first week of 
sales.  This news helped ERTS to rebound on Wednesday morning 
before shares were dragged lower by a sinking NASDAQ.  Today's 
action saw a strong tech sector push the stock to a 2.6% gain.  
Taking a look at the daily chart, we see that ERTS has traded an 
Inside Day within an Inside Day.  What this means in English is 
that shares are moving in an increasingly narrow range.  The 
bulls and bears are duking it out with no clear winner.  There 
seems to be a good deal of uncertainty with the fundamental 
picture looking a little better after the release of the Sims 
sales data, but the technical outlook looking bleak as shares 
bounce around near 52-week lows.  For the time being we're going 
to keep this play open with the expectation that ERTS will break 
out of its sideways range, violate its crucial 200-week moving 
average, and reach our entry trigger at $47.89.  Our stop will be 
set at $51.25 if the play is activated.

---

CEPH  $49.99 +1.09 (+0.39 for the week) Cephalon followed the 
broader markets higher today, rallying back into resistance from 
a converging 200-dma and resistance at $50.  It has been setting 
a series of lower highs, with the 50-dma forming a ceiling.  It 
did tick above the 200-dma of $49.85 by the close, but the 
closing print of $49.99 shows obvious bearish strength at $50. 
The recent bounce on the PnF chart into a column of "X" after the 
long decline cemented the bearish vertical count at $36, however, 
with bullish support at $43, it will take a dramatic sell-off to 
reach that count on the current move. The company announced an 
agreement with MDS Poteomics to use the MDS' technologies to help 
develop and market Cephalon's pipeline of small molecule 
compounds.  While that may help the company somewhere down the 
road, it does not introduce any new products for investors to 
seize in the short term.  Conservative traders can wait for the 
PnF reversal back into a column of "O" at $48 to initiate new 
positions, while more aggressive traders can enter on a trade 
below today's low of $48.65.  We are lowering our stop loss on 
the play to $52, just above the most recent lower high.  A 
violation of that high would alter the consistency of the 
downtrend and get in the way of our play objective. 

---

ASD $69.90 +0.95 (+0.42) Caught in the wake of the broad market,
shares of ASD are having a hard time making up their mind whether
they want to go up or down.  Yesterday's breakdown below $69
certainly looked constructive for the bears, as it gave us that
renewed Sell signal on the PnF chart.  The problem (as we pointed
out when we began coverage on the play is the bullish support
line at $68.  The rebound from that level yesterday is precisely
why we didn't advocate chasing ASD lower on a breakdown under $69.
Now that we have the PnF Sell signal though, we want to target
new entries on the next rally failure, which ought to occur
between $70-71, which is shaping up as decent intraday resistance.
With stronger resistance at $72 (also the site of the descending
trendline) fading a rally near the $71 level with new bearish
positions seems to provide a favorable risk/reward ratio.  Now
that we've gotten the first rebound off of the $68 level, the
next thrust down ought to penetrate that level, allowing us to
focus on the current vertical count of $64.  Momentum traders can
use a breakdown under $68 as a viable entry point, now that we've
gotten the first bounce off of that bullish support line.  Keep
stops set at $72.


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

TDS - Telephone Data Systems - $43.73 -0.79 (-4.09 for the week)

Company Description:
TDS is a diversified telecommunications corporation founded in 
1969. Through its strategic business units, U.S. Cellular and TDS 
Telecom, TDS operates primarily by providing wireless and local 
telephone service. TDS builds value for its shareholders by 
providing excellent communications services in growing, closely 
related segments of the telecommunications industry. (source: 
company press release)

Why We Like It:
Something is amiss with TDS.  The past two sessions have seen 
shares of the telecom provider sell off on nearly three times the 
average daily volume.  What's driving the stock lower?  Frankly, 
we can't say for sure.  A scan of recent news items on both Yahoo 
and Briefing.com turned up no fresh developments to explain the 
sell-off.  However, we did see a note that TDS was a participant 
in Salomon Smith Barney's annual Media and Telecommunications 
conference.  The company was expected to give a presentation 
during the meeting, which began on Monday and ended today.  Based 
on the sudden and high-volume nature of the recent decline, we 
think TDS announced something at the conference that spooked 
investors.  The strong volume behind the sell-off suggests that a 
lot of larger institutional players are bailing out of long 
positions.  But again, we can't say for certain what's pressuring 
TDS.  We'll be looking for analyst comments on Friday or Monday 
to help clear things up.

Something we can be more certain of is the stock's technical 
weakness.  TDS has been mired in a long-term downtrend that began 
in late-1999.  It's been a long and painful journey for 
shareholders and it doesn't look like they'll be getting any 
relief in the near future.  The stock gave back another 1.7% 
today and seemed to be completely oblivious to the broader tech 
rally.  This decline took TDS to levels not seen since the tail-
end of 1998.  Bulls will not be encouraged by the fact that the 
selling was backed by the strongest volume reading since July.  
Further technical negativity can be gleaned from the falling 
daily stochastics (5,3,3).  Although TDS has come under a lot of 
selling pressure, this oscillator is indicating that shares have 
not yet reached oversold levels.  The MACD is also looking weak, 
as it begins to roll over below the baseline.  The weekly chart 
shows no clear support until the lows for that year near $30.00.  
$30.00 also happens to be the current vertical bearish count on 
the point-and-figure chart.  This would be a reasonable downside 
target for longer-term traders.  Since we have a shorter 
timeframe, we'll be aiming for a decline to the $33-$35 region.  
Our trigger to enter this short play will be at $43.40, one cent 
under today's low.  If we're triggered we'll give TDS ample room 
to move with a stop at $47.25, just over Wednesday's high.  
Traders willing to take a little more heat could use a stop 
slightly above $47.57.  This would force TDS to fill in the small 
gap that was created on Wednesday morning.

*** January contracts expire next week ***

BUY PUT FEB-45*TDS-NI OI=233 at $3.40 SL=1.70
BUY PUT MAY-45 TDS-NI OI=  2 at $5.20 SL=2.60

Average Daily Volume = 208 K


---

PG – Procter & Gamble $85.78 +0.58 (-1.07 this week)

Company Summary:
Providing a broad range of consumable products, PG manufactures
cleaning, paper goods, beauty care, food and health care items
that we have likely all been using our entire lives.  From
toothpaste to facial tissue, laundry detergent to water filters,
and cosmetics to coffee, it is difficult to make a trip to the
grocery store without buying a handful of PG products.  The
company has been reorganized around global business units rather
than geographic regions and about half of sales come from
outside the US.

Why We Like It:
While the broad markets have staged a pretty nice recovery over
the past week, one area of the market that isn't participating is
the Consumer Non-Cyclicals.  After topping out near the $93 level
throughout the fall, shares of PG started falling again in late
October, piercing both the 50-dma and the 200-dma on the way down
to a recent low of $82 in early December.  It is interesting how
the stock has traded rather contrary to the broad market lately,
rallying when the broad market is weak and dropping when the
broad market is strong.  PG has been headed lower over the past
week, after once again rolling over from the $88 area, and if the
broad market continues with the strength seen today, it could
result in PG breaking down below the $84.50 level and testing
those early December lows.  The PnF chart is not looking favorable
to the bulls, with the current vertical count producing a bearish
price target of $77, which is very close to the $74 July lows.
With On Balance Volume continuing to post lower highs, it
certainly looks like a breakdown is coming, and we want to use
failed rallies near resistance to get ready for the breakdown.
With the 50-dma ($86.74) now below 20-dma ($87.00), it seems
apparent that a rally to the $87 level is likely to fail and
provide us with an attractive entry point on that failure.  For
those traders that would prefer to wait for a breakdown before
playing, keep your eye on the recent lows just above $84.50.  A
breakdown below that level should send the stock down to test the
early December lows in short order.  We are initially setting
our stop at $88, a level of resistance that PG hasn't been able
to hold above since early November.

*** January contracts expire next week ***

BUY PUT JAN-90 PG-MR OI=14186 at $4.50 SL=2.75
BUY PUT FEB-90 PG-NR OI=  251 at $5.60 SL=3.50
BUY PUT FEB-85*PG-NQ OI=  960 at $2.75 SL=1.25

Average Daily Volume = 3.87 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


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The Option Investor Newsletter                 Thursday 01-09-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: CALL - LTR
Traders Corner: The World Of - What Would Happen If?
Futures Corner: Five minute Closing Confirmation
Options 101: Joining the Fray

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

LTR – Loews Corp. $47.54 +1.27 (+1.24 this week)

Company Summary:
Loews Corporation is a holding company with subsidiaries engaged
in property, casualty and life insurance (CNA Financial
Corporation); the production and sale of cigarettes (Lorillard,
Inc.); the operation of hotels (Loews Hotels Holding
Corporation); the operation of offshore oil and gas drilling
rigs (Diamond Offshore Drilling), and the distribution and sale
of watches and clocks (Bulova Corporation).

Why We Like It:
Regardless of the business area in which a company operates, it
is certainly hard to argue with a nearly 2 month rise in its share
price with out so much as even a mild pullback.  Such is the case
with LTR, as it has gradually worked its way up from the $38 level
in the middle of November to today's closing high above $47.50.
Throughout that period of time, MACD has been on a consistent
bullish rise and daily Stochastics haven't gotten anywhere near
oversold territory.  A quick glance at the PnF chart, shows
another Buy signal with the trade at $46, and the current vertical
count grows to $66 with today's move above the $47 level.  In a
Barron's article just over a week ago, the head of Pzena
Investment Management called LTR a 'no-brainer' due to the fact
it was trading at a steep discount to its $70 Net Asset Value,
and judging by the nearly $3 rise since those comments, apparently
investors agree.  There is a fly in the ointment though, as
Moody's downgraded the company's senior unsecured debt rating
tonight after the close to A3 from A2, largely due to the fact
that the parent company is having to funnel more cash from other
operations to its CNA Financial Corporation insurance subsidiary.
This downgrade may be just what we need to get an attractive
entry into the play, which would occur with a dip and rebound
from the vicinity of $45.50-46.00 area.  Today's close at $47.54
was just one penny below the top of the September 20th gap down,
so a pullback from current levels is likely anyways.  If buying
a breakout is more to your liking, then wait for the stock to
push through $48 before playing, keeping in mind additional
resistance waits first at $49 and then the 200-dma at $49.53.
Place stops initially at $45.

*** January contracts expire next week ***

BUY CALL JAN-45 LTR-AI OI=264 at $2.85 SL=1.50
BUY CALL FEB-45 LTR-BI OI= 39 at $3.80 SL=2.25
BUY CALL FEB-50 LTR-BJ OI= 51 at $1.05 SL=0.50
BUY CALL MAR-50*LTR-CJ OI=515 at $1.60 SL=0.75

Average Daily Volume = 563 K



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


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

The World Of - What Would Happen If?
By Mike Parnos, Investing With Attitude

We seem to live in a world where people dream about “what ifs” or 
“shoulda’ beens” or “if it only would” or “if she would only.”  
People still play the lottery and make lists for Santa Claus.  But 
not CPTI students!  They have a grasp of reality (at least in our 
trading life), right?

People waffle between “the glass is half full or the glass is half 
empty.”  Hey, CPTI students don’t have to make those decisions.  
Why? They drink right from the bottle -- and there are plenty of 
unopened bottles in the fridge.   We’re more prepared than the 
bleeping Boy Scouts – plus, we don’t have any glasses to wash.

How do we become so prepared?  We live in another world of “what 
ifs.”  Our trading discipline tells us to select an underlying, 
determine the appropriate strategy (does it fit all the criteria?), 
know the strategy inside and out, know what adjustments to make 
under any scenario.  We determine this by examining the “what if” 
scenarios.  

Those who dive into the pool not knowing how to swim and without 
checking the water depth are destined to end up scraping what’s left 
of their portfolio off the bottom of the pool with a putty knife.  
Trading success (as well as most other life’s endeavors) is 90% 
preparation and 10% execution.
______________________________________________________________

The past two weeks, I’ve described a few variations of in-the-money 
strangles.  They’re complicated strategies and should come with a 
warning – “don’t try these strategies without adult supervision.”  
I’ve received a lot of questions  

Mike:
I have been studying your ITM Strangle write-ups of past two weeks 
and have a few questions.
 
Question 1:
In your 12/29 write-up (“Manufacturing Wealth . . .), you made this 
statement in "What would happen if..." section.  That means you 
would have a high delta that will continue to be higher than the 
delta of the short option “until the last few days prior to 
expiration.”
 
I did not understand the “until the last few days prior to 
expiration." part. What happens during "the last few days prior to 
expiration" that would change anything about the deltas of the long 
option being higher than the delta of the short option?? As I see 
it, the long option will always have a higher delta than the short 
option. Am I missing something?

Response to Question 1:
In the last few days of an option cycle, a deep in-the-money (ITM) 
option’s time value will virtually disappear.  There may only be 
$.05 of time premium left.  So, if the underlying continues to move 
in the same direction, the option’s delta will be almost 100%.  For 
every $1.00 the underlying increases, the option will increase 
almost $1.00.

In a LEAPS, or any longer-term option, there is more time premium 
built in – even those that are deep in the money.  Until this option 
approaches expiration – or gets $15-20 ITM, the delta will be less 
than 100%.

For example, as I write this, the QQQs are trading at $26.45.  The 
January 03 cycle has 2  weeks to go before expiration.  The January 
$23 call (which is $3.45 ITM) has a delta of 98%.  The January 04 
$23 LEAPS call has a delta of only 72%.  

So, if you own the January 04 $23 LEAPS call and are short the 
January 03 $23 call, you are losing $.26 (98 – 72) for every dollar 
the QQQs increase.  This position should have been dealt with 
(adjusted or closed) the moment the delta of the short option 
started to surpass the delta of the LEAPS option.
___________________________________________________________________
 
Question 2:
If the short (call) option runs ITM before expiration, because QQQ 
has hit, say, 31, you would simply unwind the position quickly 
before assignment for a “considerable” profit, because of the longer 
options higher delta and way deeper ITM state. 

At QQQ = $31, the long call is now an additional 6.00 ITM (10 
total), and you paid $8.20 (at $4.00) ITM, so it is worth 14.20, and 
the short call at QQQ = $31 is $3.25 ITM (if it was 1.25 at QQQ=29), 
for a difference (profit) of 10.95, which is more than the 8.20. So, 
there is simply nothing to worry about.
 
My question is -- how can this trade possible go wrong in “any” 
way??? Especially if you completely get out if it in one year when 
no real strangle time decay of long options has taken place? Is 
there some real danger point if you make sure you get rid of ITM 
short options? That seems to be the only "bad" thing that can happen 
(assignment).

Response to Question 2:
If the QQQs go too far too fast, you may not be able to wait until
expiration to roll out the violated short option.  You have to 
monitor the deltas and make your adjustment when the delta of the 
short option becomes larger than the option of the LEAP option.  You 
have some choices:
a)  You buy back the short $29 call and roll it out to the March or 
April $32 or $33 calls and take in more premium.  Since the QQQs 
have made a large move up, the February $21 put should be almost 
worthless.  You can buy it back for maybe $.05 and roll out to the 
March or April $24 or $25 puts and, again, take in more premium.

Regarding of the direction the QQQs take, it’s likely that, at some 
point, it will retrace and reverse direction for one of the 3-4 
point moves.  That may bring it back into its trading range.

b)  Unwind the call portion of the spread for what seems to be a 
profit.  However, as the value of the long call increased, the value 
of the long put has decreased, but not as rapidly.  To lock in your 
profit, you would have to also unwind the put spread.   You may 
then, if you choose, put the trade back on using different strikes.

Finally, you’d have to evaluate whether or not to close out the 
trade after the first year.  It will all be in the numbers.  If you 
do close the trade after the first year, LEAPS will then be 
available for 2006 and you’d be able to put on a similar two-year 
position.

What can go wrong?  If the QQQs are trading at $22 and a 
catastrophic event occurs, the QQQs could gap open the next day at 
$18.  You would find yourself in a negative delta situation and have 
some choices to make.  It’s not likely, but it is possible.  That’s 
the benefit of using an index.  
___________________________________________________________ 

CPTI PORTFOLIO UPDATE – As Of Friday’s Close

BBH Iron Condor – Currently trading at $87.10.
We want BBH to finish the January option cycle anywhere between $80 
and $95.  We’re still looking good – still in mid-range.

XAU Calendar Spread  – Currently trading at $76.52.
We bought the June $80 call for $7.20 and sold the January $80 call 
for $2.20.  Our debit (or cost basis) is $5.00.  We want XAU (Gold & 
Silver Index) to move up slowly and finish as close as possible to 
$80.  This is a longer-term cash flow generating strategy in which 
we sell against the June $80 call as many times as we can.  It’s a 
neutral to bullish strategy.  

In last Sunday’s column we noted that XAU has moved up, and broke 
through, our $80 level a little faster than we wanted.  When it was 
trading at $80.77 on Friday, the June $80 call was selling for $9.60 
and we could buy back the January $80 call for $3.30.  That’s a 
difference of $6.30.  Our cost was only $5.00.  That’s a profit of 
$1.30 on a $5.00 risk.  We stated that, if XAU trades back up to 
that level, we would close the spread and take our profits.  On 
Monday, XAU ran up over $81 and we closed our calendar spread for a 
profit of $1,300.  We bought back the January $80 call for $3.60 and 
sold our June $80 call for $9.90.

As usually happens, shortly thereafter XAU pulled back below $80 and 
eventually back to $75+.  For CPTI traders that missed the 
opportunity to close out their position on Monday and who still have 
the position, we’ll continue to monitor the XAU calendar spread.

QQQ ITM Strangle  – Currently trading at $26.70.
This is another long-term position to generate a monthly cash flow.  
We own the January 2005 $21 LEAPS call and the January 2005 $29 
LEAPS puts.  We’ve sold the February $29 calls and February $21 
puts.  Now, it’s just a matter of being patient and collecting a 
chunk of money every few months.
____________________________________________________________

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

Mike Parnos
CPTI Instructor


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

Five minute Closing Confirmation
By John Seckinger
jseckinger@OptionInvestor.com

Wouldn’t it be nice if there was a way that could confirm that a 
particular retracement area has been breached?  Now there is.  

Hopefully by now the routine is in place for traders following my 
discussion on pivot analysis.  The daily high, low, and close are used 
to calculate a pivot, two resistance levels, and two support levels.  
Afterwards, a trader then takes a range between Support 2 and 
Resistance 2 and does a retracement analysis from those levels as well.  

The question is:  When is a level really broken?  I have to admit, this 
is an extremely hard question; however, there is one way that should 
help filter out some noise and possible bull and bear traps.  It has to 
do with the close on a five-minute chart.  

In a nutshell, if the five-minute bar closes above the retracement 
area, look for a move towards the next retracement level and then put a 
stop either underneath that same bar’s low or at the retracement level 
underneath (depending how far underneath it is, since it is all about 
risk/reward).  

On Thursday, the more aggressive approach to a confirmation worked with 
both the ES and YM contract, but not with the NQ contract.  The 
conservative approach worked with all three.  It really does depend on 
how far the next objective is, and if the retracement below offers too 
much risk.  Ideally, a trader is long and then uses this technique to 
tighten stops.  

Unfortunately, bull and bear traps will still happen; however, this 
technique should save traders from a lot of possible early entries and 
added stress.  It also should allow a trader to get better execution 
and actually avoid a few traps the institutional traders put out there 
for us to fall victim to.  

When the market trades higher, traders can use the combination of 
pivot, R1, R2; retracements between S2 and R2; and/or fitted 
retracement analysis (when the first five minute period is used and a 
trader puts 0% (or 100%) at the bottom and then 19.1% (or 80.9%) at the 
top of the first five minutes.  

Let us take trading within the ES contract during Thursday, January 9th 
as the example.  The contract closed on Wednesday UNDERNEATH the 
projected pivot for Thursday.  Here were the levels heading into 
Thursday.  

Support              Resistance                 Pivot    

904.25               920.00                     913.50
897.75               929.25

When the ES contract actually opened HIGHER than the 913.50 pivot on 
Thursday, it was time to look for a five minute close above a 
retracement level outlined between 897.75 (S2) and 929.25 (R2).  This 
gave us some more resistance levels (917.25, 923.25) that do not hold 
the same weight as R1 or R2.  Even though R2 was not cleared, a trader 
could do a fitted retracement study and put the 19.1% at the top of the 
first five minutes of trading (917) while anchoring the bottom of the 
retracement at the low of that same period (first five minutes).  This 
gives more levels to use:  919.50, 921.00, 922.60, 925.10, and 927.61.  
These levels are more secondary levels.  

With the ES contract opening above its pivot, it then most likely makes 
sense to look for bids above the retracement areas and a close above 
the level(s) on a five-minute chart, since the opening was bullish in 
nature.  The question is, which level(s) should we use?  It really does 
come down to risk/reward, as well as if a trader is either getting out 
of a trade (looking to raise stop) or entering one.  

Looking at the chart below, I try to prioritize the levels.  Taking 
this one step at a time, the market is above the pivot and moves above a 
retracement derived from between S2 and R2 (917.25, green line).  
Fifteen minutes into the session and the five-minute close gave us a 
buying opportunity.  Objective is R1 (920, not shown) and R2 (929.25, 
100% area in green).  After the rise above the 917.25 area, stops 
should be placed either at the low of that period (916) or either under 
the low during the first five minutes (914.50) or the pivot.  I would 
probably use the pivot, but that is just my style of trading.  

Chart of ES03H, 5-minute


 

Traders, now long at 917.25, should also begin monitoring the blue 
retracement areas (the fitted retracement levels) and see if the 
contract fails to hit the next higher level (a failure is when one 
level is penetrated via close and then the market tries to hit the next 
level but fails and goes back under the retracement level now acting as 
support).  There was not a failure seen before 920 or 923 (since higher 
highs and higher lows) was hit, and when the contract closed above 925 
a trader should move their trailing stop up to where the chart says 
“last trailing stop.”  Note:  A trader could constantly move their stop 
higher after the contract closes above a retracement level.  

Now notice that the ES failed to hit 927 (next higher retracement area) 
and then fell back below 925 and under the low during the period when 
the market closed above 925 (arrow from “last trailing stop”).  This 
level comes in at 924.25 and be the trade exit.  Does it then make 
sense to go short?  I would say “no,” since we then have to go back to 
the pivot, R1, and R2 levels.  Notice how the pullback never reached R1 
(920).  The bias for the trading session was “buy” all day, and it only 
would have went neutral with a move either under the pivot early in the 
session or under R1 later in the day.  Neither happened.  

The caveat?  A close between the entry and R1 and that there is not an 
intra-day failure and reason to exit.  I personally would exit the 
trade, keeping a long position only if there was a strong reason on a 
weekly chart to keep the trade alive.  I noted in the futures wrap that 
I only liked a close back above 931.  We got close, but just missed it.  

Articles on this type of trading are listed below:

http://www.OptionInvestor.com/futurescorner/fc_010703_1.asp

http://www.OptionInvestor.com/futurescorner/fc_123102_1.asp

http://www.OptionInvestor.com/futurescorner/fc_121202_1.asp

http://www.OptionInvestor.com/futurescorner/fc_010203_1.asp

Ask away,

John Seckinger
jseckinger@OptionInvestor.com


***********
OPTIONS 101
***********

Joining the Fray
Buzz Lynn
buzz@OptionInvestor.com

Joining the fray has never been one of my strong suits.  In fact, 
Fundamentals Guy was a lousy player of team sports, opting instead 
for skiing, tennis, and lowbrow forms of sports car racing.  Not 
only that, but he never joined, nor did he want to join any 
fraternity in college.  "Strength in numbers" always rang hollow 
since F. G. figured it to be a weakness if he could not go it 
alone.  That's not to denigrate team sports or fraternization of 
any sort.  But rather to elevate and place greater value on 
individualistic efforts.

However, today, F. G. breaks into the crowd to become just another 
guy offering his thoughts on what lies ahead for the markets.  
Sounds boring, and maybe it is.  But I'll try to keep this as 
entertaining as possible in a sea of otherwise gray voices, Mark 
Phillips excellent prognostications from yesterday's Options 101 
column excepted.  See it here if you missed it:

http://members.OptionInvestor.com/options101/opt_010803_1.asp

I had promised last week that we'd get to my thoughts on stocks, 
bonds, interest rates, the dollar, gold and real estate, the last 
one being my profession for 15 years in a former business life 
before markets became my new profession.  That will be fun to talk 
about.  But for now, everyone's favorite subject is the future of 
the stock market.  

With that in mind let me offer two caveats, one of which is self-
serving if I turn out to be horribly wrong, and the second, which 
is axiomatic, yet goes ignored by 99 out of 100 analysts.

First caveat.  I am no guru.  I'm just another carbon-based life 
form reacting to neuro-electric input.  Guru's are eventually 
wrong and I may very well be wrong too when all is said and done.  

The problem with gurus is that they end up believing their own 
hype and fall into defending their position when wrong rather than 
considering the evidence.  Opinionated as I am, I can only react 
and write about that which the market is telling me, not that 
which I want to build a position around.  Thus, I reserve the 
right to be 100% wrong and will humbly and deservedly take the 
slings and arrows if I am.  However, my individualistic 
inclination is to listen to the markets, not what others are 
saying about the markets, and to adjust my thinking as the markets 
suggest I should.  (Ken Fisher, money manager and Forbes columnist 
doesn't call the market "The Great Humiliator" for nothing.)

After all, one of the great tenets of trading comes from the 
legendary Jesse Livermore (Reminiscences of a Speculator) who 
notes that, "When a man is wrong, the first thing he should do is 
cease to be wrong".  That's another way of saying what America's 
first billionaire, John D. Rockefeller, said more than 100 years 
ago, "It is better to consider evidence than defend a position."  
If we care to delve deeper into history, "The truth shall set you 
free."

And as long as we're offering up great quotes to live by, allow me 
introduce the second caveat, and, hopefully, destroy a self-
limiting belief by reframing the supposition of what to expect "in 
2003".  

Warren Buffet notes (and I'm paraphrasing here since I can't 
remember his exact words, though I'm sure I'd find them on the 
Berkshire Hathaway web site buried in a shareholder letter), 
"Financial performance bears no relationship to the amount of time 
it takes for the Earth to orbit the Sun."  The point is, that 
though commonly accepted as a default time frame in which the 
judge financial performance, "one year performance" is arbitrary.  
So to predict a market's position in 2003, or exactly one year, is 
at best, a crapshoot.  In fact, craps give better odds.  

OK, so what do I see in the crystal ball?  Forget one-year 
performance.  But like Mark Phillips, I too see lower stock prices 
in coming months, though I don't know exactly when, mostly for 
fundamental reasons.  Rather than bore us all, let me include a 
snippet of a Richard Russell column sent by a friend over the 
weekend.  It paraphrases quite nicely a reader letter that 
appeared in Barron's.

"The reader notes that the S&P dividend yield is currently 1.75%. 
Many analysts think the yield for the S&P could be boosted to 3% 
or even 4%.  Not so.  Currently S&P companies pay out 53% of their 
earnings in dividends.  In 1981, at which time the S&P yielded 6%, 
its companies paid out 45% of their earnings in the form of 
dividends.  But currently, this can't happen.  There just aren't 
enough earnings.  If the current S&P corporations boosted their 
dividends to just 3.5%, their payout rate would be 106%." 

"There are only two other ways the S&P companies could increase 
dividend yields to 3.5%.  They would have to double their earnings 
or decrease their current share prices by 50%, taking the S&P from 
about 900 to 450.  Thus, it's doubtful whether we'll see any real 
increase in S&P dividends over the foreseeable future.  By the 
way, even if the yield on the S&P did rise to 3.5%, that figure, 
3.5%, used to be characteristic of a TOP in the S&P, not a bear 
market bottom!"

Amen Barron's reader!  That, in a nutshell is why I do not think 
we will make new highs anytime soon.  While I'm not suggesting 
that 450 is where I see the S&P moving, under current global 
economic circumstances where Japan is devaluing the Yen (currently 
at 120 to the dollar and shooting for 150 to the dollar), China is 
flooding the market with inexpensive goods that we Americans are 
lapping up, the dollar sliding downward against the Euro, and the 
worldwide overcapacity in manufacturing is driving prices ever 
lower, corporate profits (born of a no longer spend-happy U.S. 
consumers) are going to be hard to come by.  

With no pricing power now, and the situation getting worse before 
it gets better, business is going to have to maintain margins by 
cutting expenses, aka jobs - not a pretty picture.  And for that 
reason, I would look for unemployment to rise in coming months.

As an aside, for those that point to this week's less than 
expected jobless claims, the Bureau of Labor and Statistics has 
all but admitted it makes these figures up and offers a best guess 
based on their previous best guess.  What a waste.  The truth is 
not in their best interest and other more reliable sources show 
far greater cause for concern than the BLS leads on.  Yet, Wall 
Street touts the BLS number as gospel, even though it knows 
better.  

The point is that without income, and with increasing joblessness, 
personal debt, bankruptcy, and delinquent home loans at all-time 
highs, there is not a snowball's chance in Hades that "things" 
will be better by the end of the year, at least not in my opinion.  
I will be the first to admit the error if I see evidence to the 
contrary.  But I don't see it anywhere on the radar.  The former 
almighty U.S. consumer is in the early stages of pulling in 
his/her horns, as the first step of many to come following an orgy 
of debt.  In short, we've been borrowing ourselves rich and its 
time to pay up.  Don't look for profits to rise, which is the ONLY 
reason stocks should increase in value, on that basis.

That leads me to a tangential issue of Bush's proposed new tax 
plan.  Summarized, I like it, especially the part about 
eliminating double-taxation on dividends.  What is unclear to me 
still is whether dividend distributions will be exempted at the 
corporate level, in which case the recipient would pay taxes, or, 
whether the corporation pays taxes on the income and it becomes 
tax exempt by the recipient.  Either way, that is the single 
fastest way in the world to free up capital for consumption, 
retiring debt, or investing in new equipment.  That would be good 
for the economy.  

For those in the top tax brackets (aka the ones who pay the 
majority of taxes already - forced benevolence), next to 
elimination of the death tax, this is the single greatest key that 
we have seen in decades to unlocking capital spending and aligning 
the business of the company to produce profits for the 
shareholder.  Can you tell I'm ecstatic over that prospect?

Anyway, back to the future.  Another benefit to elimination of the 
dividend tax is that it would single-handedly wipe out most 
companies propensity to report pro-forma earnings (earning before 
all bad stuff) or EBITDA earnings (earning before I trick dumb 
auditors).  Sub-par companies would have the light of truth shown 
on them.  Do they earn real money to return to the shareholders or 
not?  Can they produce a profit?  If not, wave bye-bye to the 
share price.  Honestly, it's always amazed me that investors were 
so willing to bite on a speculative piece of paper with no 
earnings and sketchy profit potential.  Yet, they would never 
consider owning a neighborhood pizza parlor that all but 
guaranteed it would never pay a dime if they owned it.  

Accordingly, the metaphoric pizza parlor owner will be forced to 
make a better pizza in hopes of pulling business revenues from his 
competitors or going out of business.  The new mantras is going to 
be "profit of die".  In the long run, it is impossible to hide 
losses.  Those that do hide them or can't profit will go by the 
wayside.  Again, not good for speculators, but very good for those 
like me who like a fat, juicy dividend.  Yes, I still like Phillip 
Morris (MO) as it pays a very stable 6%+.  

Anyway, I could go on about the state of the economy, the world, 
taxes, etc. for hours.  However, the deadline approaches, and I'm 
getting long-winded on the subject.  

In summary, I don't see a bullish picture for stocks this year and 
expect the primary trend to remain down, though as J.P. Morgan 
often noted, "Markets fluctuate".  To that end, I have a high 
expectation that stocks will see new lows sometime this year, 
interspersed with continued analyst cries that, "This is the 
bottom" on every new rally.  Don't bet on it.  Only when we hear 
analysts say (at least those that are still employed) that they 
won't touch stocks with a 10-foot pole, that the stock market is a 
horrible investment, and when values become uncommonly good, the 
bottom will be found.  Until then, bet on the bear in the equity 
markets.

Next time we'll get to bonds, interest rates, and the 
inflation/deflation arguments.  Comments always welcome.  Make a 
great weekend for yourselves!

Buzz


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