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Daily Newsletter, Monday, 01/27/2003

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The Option Investor Newsletter                   Monday 01-27-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Same Story, Same Result
Futures Wrap: Drowning In Red
Index Trader Wrap: White Knuckled
Weekly Fund Wrap: War Fears Sink Stocks
Traders Corner: Now What?

Updated on the site tonight:
Swing Trader Game Plan: What You See

Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
01-27-2003                  High    Low     Volume Advance/Decl
DJIA     7989.56 -  141.45  8150.34 7957.82   1693 mln  178/1501
NASDAQ   1325.27 -   16.87  1349.83 1320.32   1412 mln  352/1048
S&P 100   429.47 -   6.67   437.93  427.03    totals    530/2549
S&P 500   847.48 -   13.92  863.95  844.25
RUS 2000  368.58 -   6.48   375.06  368.25
DJ TRANS 2144.01 -  19.32  2188.58 2140.40
VIX        39.77 +   4.00    40.89   36.71
VIXN       46.59 +   1.54    47.50   45.24
Put/Call Ratio 1.02
*******************************************************************

Same Story, Same Result
by Steven Price

Geo-political events played out pretty much as expected today and 
last week's pre-emptive sell-off continued. The U.N. weapons 
inspection report from Hans Blix essentially said that Iraq had 
not cooperated as far as giving information on chemical, 
biological and conventional weapons that the inspectors know 
exist. While there was has been no smoking gun found thus far, 
the U.S. seized the opportunity to up the rhetoric ahead of the 
President's State of the Union address Tuesday.  Blix said that 
"Iraq appears not to have come to a genuine acceptance, not even 
today, of the disarmament which was demanded of it and which it 
needs to carry out to win the confidence of the world and to live 
in peace."  U.S. Ambassador to the UN John Negroponte said Iraq 
was back to business as usual and that it had not cooperated in 
the active manner required by UN resolution 1441.  White House 
spokesman Ari Fleischer took it a step further, saying that 
incomplete cooperation was no cooperation. If one thing was clear 
by morning's end, it was that the U.S. was preparing to go the 
route of invasion and was simply waiting for something to hang 
its hat on.

The statements from the U.S. got the markets rolling downhill, 
sending them through last week's lows and even breaking into the 
7000s, as the Dow broke 8000 to the downside on a closing basis 
for the first time since October 15, 2002.  The head and 
shoulders pattern that appeared to be forming over the last few 
months finally saw a neckline break last Friday.  In fact, the 
breakdown came in much the same way as the one we saw last 
September. Back then, we got a quick sell-off over just a few 
days, a mild one-day bounce and then a decisive rollover to the 
measuring objective of the pattern.  So far, we are seeing the 
same thing, with the one-day bounce on Thursday and the continued 
rollover through the neckline on Friday.  The circumstances are 
different this time around, with the Iraq data due out this week, 
but back in the summer we witnessed similar war concerns.  Does 
that mean we will fulfill the measuring objective of the pattern 
down to 7500?  It means nothing has occurred yet to deter that 
possibility.  Of course, that's easy to say before several days 
of economic reports, earnings and political events that could all 
turn the tide.  

Chart of the Dow


 

In the coming week, we will get a State of the Union address from 
President Bush, in which he is likely to highlight his case 
against Iraq, using the recent weapons report to supplement 
earlier arguments; we'll get the UN debate on the issue beginning 
on Wednesday; we'll get Consumer Confidence, Durable goods, New 
Home Sales, GDP, Personal Income, Personal Spending, FOMC meeting 
and PMI.  With all of this economic data swirling around the Iraq 
debate, certainly anything can happen.  A look at the charts 
shows the recent sell-off has us in very oversold conditions, 
which would seem to indicate a bounce at some point.  However, we 
saw similar conditions on the last breakdown, as well and the 
bounce was a long time coming.  The possibility that the Iraq 
news was basically figured into the markets also remains and if 
we were going to finally get a bounce off the big sell-off, the 
round number of 8000seemed a reasonable point for that bounce. We 
tend to stair step down, rather than just plummet and the last 
few days have been a pretty strong plummet, with a loss of 800 
Dow points in eight trading sessions. If we look at the shorter-
term charts, however, we have been seeing some stair stepping, 
which will give us an idea of when we can assume we are seeing a 
bounce.  Those stairs, or intraday resistance levels to keep an 
eye on in the Dow are 8600, 8400, 8175 and 8040.  If we begin to 
take out these intraday levels, it will throw up the first 
signals that we are seeing at least a short term intraday bounce.

30 minute chart of the Dow


 


While the Dow, SPX and OEX all took out their December 31, 2002 
lows on Friday, the Nasdaq Composite and NDX actually held above 
those levels. If there were going to be a bounce in the broader 
markets, those December 31 lows of 1335 (1327 intraday) in the 
COMP and 984 (977 intraday) in the NDX, certainly appeared as 
though they would be logical points from which to bounce.  The 
COMP did not hold at that level, taking out the relative low and 
closing at 1325, ten points below the Dec. 31 close and even 
below the intraday low.  The NDX, however, held just above that 
level, finishing the day at 986.  

Chart of the COMP


 

Chart of the NDX


 


The chip stocks, which have led the tech indices in recent 
months, gave up additional ground, with the Semiconductor Index 
(SOX) falling another 4 points today.  More importantly, though, 
the index fell through yet another recent support level and the 
most significant level from which we could have expected a bounce 
before entering a vacuum that appears as though it could lead to 
a re-test of October lows in the low 200s.

Chart of the SOX


 


The retail sector, as represented by the S&P Retail Index 
(RLX.X), also has sunk to a new 52-week closing low.  With 
Consumer Confidence and Consumer Sentiment reports due out this 
week, we may be seeing a foreshadowing of what traders are 
expecting.  As we head closer to war, fuel costs remain high, and 
payrolls remain on the low end, these consumer surveys will give 
us an indication of just how willing consumers will be to spend.   
Stocks such as Wal-Mart (WMT), Target (TGT) and Kohl's (KSS) 
continued their slide ahead of those reports, indicating low 
expectations for Consumer Confidence, which is due out Tuesday 
and Consumer Sentiment, which comes out Friday.

Chart of the RLX


 

Although I've painted a somewhat bleak picture so far, bulls can 
take solace in the action in the bond markets.  Bonds have proved 
to be a reliable contra-indicator to equities.  Today's sell-off 
should have been confirmed with buying action in the treasuries.  
That did not happen. Instead we saw selling in the bond market.  
One theory offered by bears is that money is finding its way out 
of U.S. dollar denominated assets, which include U.S. bonds, as 
well as equities.  Certainly the tremendous slide the dollar has 
been on would back up this theory.  The dollar actually held 
steady today, finishing the session unchanged.  In any case, the 
bearish confirmation that has been reliable in the past did not 
surface today. That could indicate that the sell-off really had 
little to do with an allocation out of stocks and into 
treasuries, but rather simply on war fears that kept money out of 
the market.  

We did make several intraday rebound attempts, but each failed 
and in the end we closed under significant support levels in the 
Dow at 8000, SPX at 850, OEX at 430 and COMP at 1335.  The trend 
was down before war fears took over Friday and Monday and it 
remains down. Bullish percents are in full retreat in the major 
indices, indicating a reversal in sentiment from prior 
bullishness to start the year.  We are likely to see more extreme 
reactions as the week goes forward, but until we see a trend 
reversal, the bears are still in charge. 


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

Drowning In Red 
By John Seckinger
jseckinger@OptionInvestor.com

Another day of 'technical damage' within a couple of the futures 
contracts; however, does it still make sense to sell weakness, or 
is it now time to look for a bounce?    

Monday, January 27th at 4:15 P.M. 

Contract      Last    Net Change    High        Low       Volume    

Dow Jones    7989.56  -141.45     8150.34     7957.82      
YM03H        7993.00  -120.00     8141.00     7935.00     33,013 
Nasdaq-100    986.41    -9.77     1006.26      982.02      
NQ03H         988.50   -11.50     1007.50      980.00    267,667
S&P 500       847.48   -13.92      863.95      844.25      
ES03H         847.25   -13.00      863.75      842.25    811,112

Contract         S2         S1       Pivot        R1         R2    

Dow Jones      7840.05    7914.80   8032.57    8107.32    8225.09
YM03H          7817.00    7905.00   8023.00    8111.00    8229.00
Nasdaq-100      967.32     976.86    991.56    1001.10    1015.80
NQ03H           964.50     976.50    992.00    1004.00    1019.50
S&P 500         832.19     839.83    851.89     859.53     871.59
ES03H           829.58     838.41    851.08     859.91     872.58

Weekly Levels

Contract         S2         S1        Pivot        R1         R2    

YM03H         7748.00    7933.00    8271.00    8456.00    8794.00
NQ03H          962.75     981.25    1011.25    1029.75    1059.75
ES03H          825.25     842.75     875.00     892.50     924.75

Monthly Levels (December's High, Low, and Close)

Contract        S2         S1        Pivot       R1         R2    

YM03H         7726.00    8028.00    8524.00    8826.00    9322.00
NQ03H          861.75     924.25    1041.75    1104.25    1221.75
ES03H          814.75     846.75     900.25     932.50     985.75

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.  

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

Before we begin, let us take a look at Jim Brown's day in the 
Futures Monitor.  Recapping his signals:    

Short 845.50, exit 845.75, loss -0.25
Long 846.00, exit 848.75, gain +2.75
Short 846.50, exit 848.75, loss -2.25
Short 847.00, exit 845.75, gain +1.25
Short 846.50, exit 846.00, gain -0.50

Total for the day = +1.00 points

For more information on Jim's posts for Tuesday, please go to the 
following link and download the current market monitor.  If you 
already have the most recent version, simply go to the Futures 
Monitor Post on the upper left hand portion of the applet.  

http://www.OptionInvestor.com/itrader/marketbuzz/download.asp

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

The ES contract did find support within the 839.50 to 842.75 
aforementioned range, but ended up gravitating back to the 
MONTHLY S1 level of 846.75.  This 839.50 to 842.75 area should 
hold significance again on Tuesday; therefore, a break under 839 
should portend a move down towards 829.  Both the 839 and 829 
area match up well with S1 and S2 on a daily basis.  Looking at a 
daily chart below, the Directional Movement indicator has finally 
moved above the 'magic' 20 level; thus indicating that sellers 
are aggressive and will try to create a new range lower.  It is 
important to wait for confirmation the following day.  The 
high of the range could come in at the 200 EMA, shown below at 
870.  This area matches up with the daily R2 reading.  

The ADX should be used for more intermediate projections, but 
does imply that shorts should sell rallies and momentum should 
pick up to the downside.  The ADX also notes that stochastics and 
MACD oscillators should be put aside in favor of moving averages.  
Remember, the ADX is now just above 20, so shorts should make 
sure it doesn't decide to go back underneath and signal a trap.  
The ES contract is also below its Bollinger Bands; also signaling 
aggressive shorts.  The daily pivot comes in at 851, and a move 
above here could send the contract to strong resistance at 865.  

Chart of ES03H, Daily


 

Looking at a 120-minute chart of the ES contract, notice how the 
index is in-between a convergence area of 854-855 and Tuesday's 
pivot.  This does paint a neutral picture, but an opening within 
this range should give bulls and bears a solid risk/reward set-up 
going forward (above the pivot, possibly bullish, while under 844 
should be the catalyst for a move to 839).  For less aggressive 
traders with an intermediate outlook, I would be very surprised 
if the 865-875 range is taken out.  On the other hand, I would 
also be surprised if we do NOT see bids near 829.  

Chart of ES03H, 120-minute chart


 

Bullish Percent of SPX: 49.90% and the column of O’s has reached 
eight (Recent High at 66%, Low of current column at 58).  Risk 
still remains on the buy side for the contract, but the 50% area 
is 1/2 way in-between 70 and 30 percent.  If we see even one more 
"O" (will be reached at 48%), I will expect this indicator to 
reach the 40% level.  In order to really look for a bottom, I 
would like to see a move under 30%, followed by a row of "X's" 
that takes the indicator back above this 30 area.  

The March E-mini Nasdaq 100 Contract (NQ03H)

The "bearish engulfing" pattern seen on Friday in the NQ contract 
held true to form, and the 982 support area was penetrated by 
just two points on Monday (intra-day low of 980).  Going forward, 
has the NQ contract formed a double bottom?  The momentum 
indicator, the ADX, didn't quite hit 20 and does gives bulls a 
reason to look for a move higher.  In fact, the next intermediate 
retracement area above is at 1023.  What is the risk for bulls?  
I believe a move back under 980 would pressure any longs to exit 
and give shorts a reason to look for more selling pressure.  The 
objective would be 963.  

Chart of NQ03H, Daily


 

Looking at a 90-minute chart of the NQ contract, look for short-
term resistance above the daily pivot within the 1004-1011 area.  
If the aforementioned 980 area is taken out, look for a move to 
975 and then possibly 963 before bids enter the market.  It 
is the 963 area that could also lines up well with the bottom of 
the daily Bollinger Bands (shown above).  Therefore, just like 
with the 982 area before, I expect this area's significance to be 
increased.  

Chart of NQ03H, 90-minute


 

Bullish Percent for NDX:  This indicator fell 1% to 51% on 
Monday, and unable to add another "0's" during the day's 
weakness.  There can still be support at the 50% area, but this 
indicator continues to portend bears will be selling rallies 
going forward.  Note:  The NDX will give a sell signal at 975, 
according to P&F charts.  

The March Mini-sized Dow Contract (YM03H)

The noted bearish channel from 8152 to 8179 was almost tested on 
Monday as the YM contract came under pressure once more and 
closed underneath 8000 .  As the chart below shows, the 61.8% 
retracement level was tested on Monday; however, the close back 
above should indicate that bears will wait until Monday's low is 
taken out before selling once more.  The contract is, however, 
underneath the low-end of its Bollinger Bands as the ADX index 
came 0.01 point from giving bears the 'go ahead' signal.  If the 
YM index does get a bounce, I still expect the 8152 to 8179 area 
to cap any rally.  Since these levels are high above the close, 
let us look at a more micro picture.  

Chart of YM03H, Daily


 

A 30-minute chart of the YM contract shows the retracement levels 
between S2 and R2, and the chart also shows the effectiveness of 
the daily retracement areas as well (right hand side).  Using 
this chart, a 30-minute close underneath the 7948 area should 
spell disaster for longs.  Objective would then be 7617.  The 
daily pivot at 8024 appears to be at a solid area, since it is 
just above the recent congestion area.  If 8024 is taken out, 
expect only 8072 to give bulls trouble before the 8151 area.  

Chart of YM03H, 30-minute


 

Bullish Percent of Dow Jones:  Unchanged on Monday at 40.00%, but 
still in column of O’s (now 10 deep).  The Bullish Percent 
indicator still has intermediate bearish implications.  It does 
indicate that bears will look to sell rallies and be aggressive 
on weakness as well.  Nothing has changed since Thursday, but a 
close underneath 30% should start to shift risk into the bears' 
camp.  Stay tuned.  Note:  The DJIA, on a P&F chart, added three 
more "O's" on Monday and the contract now has a bearish price 
objective of 7100.  

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com 


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

White Knuckled

The market was rigid with fear while showing us relatively little 
movement.  All of the major indices were down today, and all have 
erased their gains for the year.  We saw significnat spikes in 
the volatility indices, with the VIX closing at 39.77, VXN at 
46.59 and QQV at 40.66.  Similarly, we saw persistently high put 
to call readings, with the entire day above 1.0, which on any 
other day would have been a very bullish indication.  However, 
the expected bounce never materialized, and while the day 
finished in the red, it was by relatively little, with the INDU 
down 141 to 7989, SPX down 13.93 to 847.47, OEX down 6.68 to 
429.46, COMPX down 16 to 1325 and QQQ down .25 to 24.57.

Other than the put to call readings and the volatility measures, 
all options related, the breadth indicators were less extreme, 
with the TRIN closing at 2.37 and the TRINQ at 1.33.  Volume was 
not particularly impressive with 1,442,190,336 NYSE shares 
trading and 1,433,737,856 Nasdaq shares.  Many have asked me, and 
I have struggled with the notion of volume.  Many traders love to 
see moves "confirmed" by large volume.  My conclusion has been 
and is that volume is what creates support and resistance levels, 
premised on the fact that traders don't like to take losses and 
prefer to take profits.  The more of them that got in or out at a 
given level, the stronger that s/r level will be.  This is why a 
light volume down day is bearish, and not bullish.  Explosive 
volume on a decline will mark an approaching bottom.  Light 
volume on the way down destroys value without freeing up any 
liquidity, and incentivizes traders holding bullish positions to 
sell as the decline continues.

So is this the relative top or the bottom?  My conclusion is that 
short term, we might see a bounce, but in the longer term we're 
closer to a top. However, my opinion is meaningless-  let's let 
the charts do the talking.

The INDU fell continued its decline, drilling the different 
oscillators down.  There is nothing for a bull to celebrate in 
either the stochastics or the MacD.  You'll note the "kinky" 
setting on the stochs-  I've found that it achieves a decent 
balance between too many signals and not enough or signals that 
are too late to be useful.



Note that the 13 day moving average is kissing the midpoint of 
the bollinger bands, which is a 20 day moving average.  If this 
cross completes, that will be a fresh sell signal as well.  
However, all is not bearish on this chart.  The bottom of today's 
INDU coincided with sypport going back to the end of September/ 
beginning of October.  As well, a significant part of today's 
candle exceeded the lower bollinger band, which generally implies 
some sort of corrective bounce the following day.  The chart 
shows us that the 8250 level should limit the upside.  Moreover, 
given the bearishness in the MacD and stochastics, I'd be 
surprised to see the INDU even make it that high.



The SPX tells the same story.  We have the beginnings of a 
bearish cross over the 20 day SMA by the 13 day SMA, and no hint 
of a buy signal from either the stochastics or the MacD.  The 
lower bollinger band was violated to the downside, and price 
found support in the congestion zone from the end of September.  
A short term bounce is implied by the put to call ratio and the 
bollinger band violation, but I expect it to be minor and in any 
event should not exceed 877 if it makes it that high.  Note that 
877 is the neckline of the head and shoulders formation that 
broke down last week.  The downside target implied by that 
formation is approximately 800.



The OEX looks no different, though the 20 day SMA has yet to be 
kissed by the 13 day SMA.  As well, the lower bollinger band was 
not violated to the same extent as we saw on the SPX and INDU.  
These are minor differences to me and not particularly important.  
Support was found again in the end-of-October congestion zone at 
427, while resistance in the 440 area looks stronger.  We could 
see a light bounce, but it shouldn't amount to much.



The COMPX held up relatively well, and note how much better its 
chart looks compared to the INDU, SPX and OEX.  It is still 
struggling to hold its neckline, and has yet to challenge its 
lower bollinger band.  For this reason, I expect any bounce to 
originate in those indices, and not the COMPX.  Also note that 
the 13 day/ 20 day SMA kiss is even farther away than in the 
other indices.  Again, this shows the relative strength in the 
COMPX.



The QQQ looks like the strongest of the indices.  It approached 
the neckline of its head and shoulders pattern but did not 
seriously challenge it.  Support came just above the September 
high of 24.35, and I'm looking to that primary level for signs of 
a bounce if we get one, but again, the support levels on the INDU 
and SPX should come into play first if they didn't already today.


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

War Fears Sink Stocks

Stock mutual funds fell along with stocks last week as lackluster 
earnings reports did little to entice investors worried about war 
with Iraq.  The major averages were sharply lower Friday to close 
the week, with the Dow 30 and S&P 500 hitting their lowest levels 
since October.  For the week, the popular Vanguard 500 Index Fund 
(S&P 500) lost 4.5 percent, diving into the red on a year-to-date 
basis through Friday, January 24, 2003.  The Dow lost 5.4 percent for the week. 




 


As you can see from the chart above, things haven't improved this 
morning with the blue-chip index sinking further.

According to Lipper, the average large-cap core equity fund had a 
4.1 percent weekly loss, only slightly better than the S&P target 
index.  Equity-income and large-cap value funds were particularly 
hard hit, losing around 4.6 percent to 4.7 percent on average for 
the week.  Meanwhile, gold prices and gold mutual funds generated 
sharp gains last week amid the turmoil.  They were up 5.6 percent 
on average for the week, according to Lipper.  

Bond mutual funds rose along with bond prices.  For the week, the 
Vanguard Total Bond Market Index Fund, which tracks the return of 
the Lehman Brothers Aggregate Bond Index, was up 0.4 percent.  As 
the week before, U.S. long-term bond funds and international bond 
funds were the highest performers, producing weekly total returns 
of one percent or more.  High-yield bond funds struggled, closing 
the week down 0.1 percent on average. 

U.S. Equity Fund Group

 Week   YTD
-4.5%  -2.0%  Vanguard 500 Index Fund (VFINX) 
-3.3%  -2.6%  Vanguard MidCap Index Fund (VIMSX)
-3.3%  -2.0%  Vanguard SmallCap Index Fund (NAESX)
-4.1%  -1.9%  Vanguard Total Stock Market Index Fund (VTSMX)
-4.1%  -2.1%  Lipper Large-Cap Core Equity Fund Average 
-3.3%  -1.7%  Lipper Mid-Cap Core Equity Fund Average 
-3.2%  -2.2%  Lipper Small-Cap Core Equity Fund Average
-3.4%  -1.0%  Lipper Multi-Cap Core Equity Fund Average
-2.1%  +1.6%  Lipper Science & Technology Fund Average

It was a tough week for the U.S. equity fund group, with large-
cap funds leading the decline as they did the week before.  Two 
of the more conservative equity fund categories - equity income 
funds and large-cap value funds - sustained the biggest average 
losses last week.  For example, Fidelity Equity Income Fund and 
Vanguard Equity Income Fund both lost 5.3 percent last week.

Other U.S. fund categories, including mid/small-cap funds, pro-
growth funds and science and technology funds finished the week 
lower as well but losses were slightly less.  The $15.5 billion 
Fidelity Low Priced Stock Fund lost 3.3 percent, similar to the 
weekly declines for the mid-cap and small-cap indices.  T. Rowe 
Price Science & Technology Fund was 1.9 percent lower last week, 
indicative of the weekly losses in the tech sector.

International Equity Fund Group

 Week   YTD
-3.1%  -1.9%  Vanguard Developed Markets Index Fund (VDMIX)
-2.4%  -1.3%  Vanguard Emerging Markets Index Fund (VEIEX)
-3.1%  -1.7%  Vanguard Total International Stock Index (VGTSX)
-3.0%  -1.6%  Lipper International Fund Average
-2.6%  +0.1%  Lipper Emerging Markets Fund Average
+5.6%  +5.6%  Lipper Gold Fund Average

Diversified international equity funds lost ground also.  Weekly 
declines were a little less than their U.S. equity counterparts, 
especially in the emerging markets where weekly losses were less 
than three percent.  Some foreign stock funds lost more than 4.0 
percent last week including Putnam International Growth, Artisan 
International, T. Rowe Price International Stock, and the Harbor 
International Fund. 

War fears sank the global equity markets but caused gold to soar, 
with the average gold mutual fund up 5.6 percent during the week.  
The largest gold fund, Fidelity Select Gold, posted a 6.1 percent 
weekly total return to lead the way.  

U.S. Fixed Income Fund Group

 Week   YTD
+0.3%  +0.1%  Vanguard Short-Term Bond Index Fund (VBISX)
+0.6%  +0.0%  Vanguard Intermediate-Term Bond Index Fund (VBIIX)
+1.0%  +0.0%  Vanguard Long-Term Bond Index Fund (VBLTX)
+0.4%  +0.1%  Vanguard Total Bond Market Index Fund (VBMFX) 
+0.2%  +0.2%  Lipper Short Investment-Grade Fund Average
+0.4%  +0.4%  Lipper Intermediate Investment-Grade Fund Average
+0.5%  +0.3%  Lipper Corporate A-Rated Debt Fund Average
-0.1%  +2.5%  Lipper High-Yield Fund Average
+0.4%  -0.0%  Lipper U.S. Government Fund Average

Investors sought the income and stability provided by bond funds 
last week in a repeat performance of the week before.  The total 
investment-grade bond market closed the week 0.4 percent higher, 
with intermediate- and long-term bond funds doing better overall 
than funds with short-term average maturities.  For example, the 
Vanguard Long-Term U.S. Treasury and Long-Term Bond Index mutual 
funds returned 1.0 percent for the week.

Leading intermediate-term bond funds, such as PIMCO Total Return 
and American Funds Bond Fund of America generated weekly returns 
similar to the 0.4 percent total bond market index return.  Bond 
funds seeking high total real returns, such as PIMCO Real Return 
Fund and Vanguard Inflation-Protected Securities Fund had weekly 
returns of 0.8 percent, outpacing their intermediate-term peers. 

International Fixed Income Fund Group

Week   YTD
+1.0%  +2.0%  Lipper Global Income Fund Average
+1.3%  +2.9%  Lipper International Income Fund Average

It was another good week for global and international bond funds, 
with most funds in the group up 1.0 percent or more for the week.  
Leading the way with a 1.5 percent weekly return was the T. Rowe 
Price International Bond Fund followed by American Funds' Capital 
World Bond Fund up 1.4 percent.  Along with long-term bond funds, 
international income funds have been the place to be in 2003 with 
the average fund up 2.9 percent since December 31.

Balanced Fund Group

 Week   YTD
-2.3%  -1.1%  Vanguard Balanced Index Fund (VBALX)
-2.6%  -1.1%  Lipper Balanced Fund Average

With bond price gains partially offsetting stock price declines, 
balanced funds lost only 2.6 percent on average last week, lower 
than the average pure equity fund.  Balanced funds with a higher 
percentage of assets invested in fixed income securities such as 
Vanguard Wellesley Income Fund shaved more off the week's losses.  
It declined by just 1.7 percent last week.

Money Market Fund Group

Yield
1.20%  Vanguard Prime Money Market Fund (VMMXX)
0.82%  iMoneyNet.com All Taxable Money Market Fund Average

The MMF group's low-cost leader, the $50 billion Vanguard Prime 
Money Market Fund, sports a current 7-day simple yield of 1.20%, 
some 38 basis points better than the 0.82% yield on the average 
taxable money market fund, using iMoneyNet.com's latest survey.

According to iMoneyNet.com, the highest current yield belongs to 
the PayPal Money Market Fund (402-935-7733).  It sports a simple 
7-day yield of 1.40 percent.  RBB MMP/Sansom Fund (800-430-9618) 
and Touchstone Money Market Fund (800-543-8721) are the only two 
other prime-retail money market funds with current yields higher 
than the Vanguard Prime Money Market Fund.

Mutual Fund News

Morningstar's Brad Sweeney had an interesting article last week 
on beating the low money market yields today.  It discusses the 
use of stable value funds to beat MMF yields, something we have 
already touched upon this year on the website.  Our Weekly Fund 
Screen on Tuesday, January 14 went in search of good funds with 
ultra-low volatility.  The two funds mentioned in Morningstar's 
article, PBHG IRA Capital Preservation and Scudder Preservation 
Plus Income, were identified in our screening process that week 
as potential candidates.  Morningstar duly noted in its article 
that you should look for stable value funds, which meet certain 
standards, such as the two funds identified herein.

The SEC last week passed a controversial rule requiring open-end 
funds, closed-end funds, and investment advisors to disclose how 
they voted their proxies (this includes all companies invested).  
According to the Wall Street Journal, the SEC approved the rule 
in spite of the vehement opposition by Fidelity, Vanguard Group, 
and the Investment Company Institute.  The chairmen and CEOs of 
Fidelity and Vanguard lobbied hard against the new rule, saying 
it would raise fund expenses and would possibly have unintended 
consequences.

The Fremont Group of San Francisco, California announced that it 
plans to sell Fremont Investment Advisors' investment management 
and mutual fund business sometime within the next year according 
to Morningstar's Fund Times report.  Fremont is private held now.  
The firm says the ownership change should not disrupt investment 
operations or how the mutual funds are currently managed - we'll 
have to see about that.  If you are Fremont shareholder, you may 
want to give them a call and find out more information, plus how 
it might affect you.

Putnam Investments, Montgomery Funds, Oppenheimer Funds, and the 
Liberty Funds are some of the other fund families covered in the 
latest Morningstar Fund Times report.  Putnam reduced tech staff, 
while Montgomery made more manager changes, Morningstar reports. 
Oppenheimer is launching a stable value fund, while Liberty lost 
one of its co-managers on the $1.8 billion Liberty Growth/Income 
Fund.  For further information, go to the Morningstar website at 
www.morningstar.com.

Steve Wagner
Editor, Mutual Investor 
steve@mutualinvestor.com


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

Now What?
by Mark Phillips
mphillips@OptionInvestor.com

Over the past few months, we've talked about some interesting,
and I think powerful, measures of broad market strength/weakness
and how we might use them to stay on the right side of the
dominant trend in the market.  Most recently, I introduced the
concept of the McClellan Oscillator and Summation Index, which
is available for both the NYSE and the NASDAQ markets.  We can't
get them on Qcharts, but since they are only updated on an
end-of-day basis, the daily charts available on StockCharts.com
are just as good.

In case you missed the article where I dealt with those
indicators, it can be found in the Trader's Corner archives
or by clicking on the following link.

http://www.OptionInvestor.com/traderscorner/tc_011303_1.asp

When I wrote that article, I hadn't yet discovered the actual
symbols to use in StockCharts to access those indicators.
Thanks to the impressive knowledge base of my readers, I've
since been educated and found the four symbols that we need
to use.

NYSE McClellan Oscillator - $NYMO
NYSE McClellan Summation Index - $NYSI
NASDAQ McClellan Oscillator - $NAMO
NASDAQ McClellan Summation Index - $NASI

While I haven't shown them here, a quick trip over to the
StockCharts.com site will show you that these indicators have
been hinting at internal weakness for several weeks now, most
notably in the McClellan oscillators, which have been giving
us a series of lower highs since the end of November (actually
early November in the case of the NYSE).  Keep in mind that the
actual value of these oscillators is not what gets my attention,
it's the chart pattern.  Isn't it interesting that both the
$NAMO and $NYMO indicators are now sitting very near the lows
posted in October and July of 2002.  That gives a hint that new
bearish positions near current levels is not the best course of
action, as the markets are now becoming quite oversold. Can they
fall further?  Certainly!  But as they become more oversold, the
risk of a strong (if short-lived) short-covering bounce increases.

That said, I don't think it makes sense at this point to try
gaming the upside, as there are too many factors that are
pointing to significant further downside over the intermediate
term.  First up are the readings from the Summation indexes.
Looking at a chart of the $NYSI indicator, we can see that it
posted a higher high in early January, while the NYSE Composite
($NYA) posted a lower high.  By itself, that doesn't tell us
anything, but the action over the past week certainly does.  The
$NYSI has rolled over from its recent high and today violated the
late December low.  Not only does this indicator appear headed
lower, but we now have bearish divergence between price and the
summation index, and that's a powerful bearish signal.

The picture is a bit different over on the NASDAQ, as there is
no divergence to look at, just weakness.  The $NASI indicator
topped out in early December, caught a weak rebound in early
January and has rolled over again, giving us a lower high that
corresponds nicely with the lower high in price on the NASDAQ
Composite (COMPX).  Today's selloff has the COMPX fractionally
breaking below the December price lows, while the $NASI
indicator breaks its own December lows.  Weakness abounds here
as well.

We don't want to use these indicators in a vacuum though, as
they're still in the evaluation phase, at least as far as I'm
concerned.  So let's step back to another measure of market
breadth, one that we're all more comfortable with, Bullish
Percent.  This measure of a market's internal strength/weakness
gets a fair amount of press time by various writers at OI,
myself included.  Jeff Bailey regularly updates them, along
with providing excellent interpretation in the daily Index
Wraps.  But a couple months back, I took a fresh look at the
Bullish Percent charts, stepping outside of the traditional PnF
format to see what other nuggets of wisdom might be found.

At first blush, it looked like I might have stumbled onto
another way to read those charts that could be valuable,
especially for those who are uncomfortable with the PnF
charts.  I detailed the concept in another of my past articles,
which you can access at the following link if you need to catch
up, or need a refresher.

http://www.OptionInvestor.com/traderscorner/tc_110402_2.asp

What we're looking for is the Bullish Percent (BP) reading to
cross over its 10-dma after being either in oversold (below 30)
or overbought (above 70) on the SharpChart.  This is just a
different way of viewing these indicators without having to
interpret the different BP readings like Bull Confirmed or
Bear Correction.  Well, we know that most of the major market
indices have gone back into Bear Confirmed status, their most
bearish condition.  That includes the DOW, OEX and NDX, with
the SPX still holding onto its Bull Correction status.  It's
rather interesting to note that the Nasdaq Composite is still
holding onto Bull Confirmed, indicating that this is one of
the stronger areas of the overall market.

But looking at the BP charts in the SharpCharts format, we can
see that every last one of them (DOW, SPX, OEX, NDX and COMPX)
have crossed back under their 10-dma and with the exception of
the COMPX, each of them have broken the BP lows set in late
December.  The fact that the COMPX hasn't broken its December
BP lows is a confirmation of the relative strength being
demonstrated both in the standard PnF BP format and in the
recent price action.  We do have to bend the rules a bit on the
COMPX BP, as the 55-56 area is the most "overbought" this index
has been able to get since 1996.  So we can see that the recent
high at 49% definitely qualifies as overbought.

So while the readings we're currently seeing on the McClellan
Oscillator can be interpreted as oversold, meaning we're due
for a decent bounce, the more significant (my opinion) readings
on the Summation index and Bullish Percent tell me that we've
got some significant work to do on the downside first.

In addition to these measures of internal market strength
(actually weakness), a quick look at the weekly charts of the
major indices shows problems for the bulls as well.  The
weekly Stochastics on each of the major indices has now posted
a short-cycle bearish reversal and MACD is rolling over again
below the zero line.  More signs of weakness there.  The reason
I've taken the time this afternoon to highlight all the bearish
factors that I think are weighing on the market from a technical
basis is due to the series of emails I received today from
readers wondering, with the VIX testing 40 again, if it is time
to start considering a repeat of the MOCO strategy that I
outlined last year.  I gave a concise answer to that question
in the Market Monitor during the day, where I basically said
"No".  After going through all of the issues I've covered here
this afternoon, I hope you can see that such a bullish strategy
is premature at this point.

For those readers unfamiliar with the term "MOCO", here are the
links to the pertinent articles that outline the strategy.

http://www.OptionInvestor.com/traderscorner/tc_062402_1.asp
http://members.OptionInvestor.com/options101/opt_062602_1.asp
http://www.OptionInvestor.com/traderscorner/tc_071602_1.asp

While the VIX is certainly getting set to enter the lower end
of the "action zone" for implementing the MOCO strategy, there
are some additional factors that I want to see (at a minimum)
before I'll start to get interested.

1. Weekly Stochastics bottoming out in oversold
2. Bullish Percent readings for the major indices moving down
   below the 30% (oversold) threshold and starting to reverse
   upwards.  The secondary check here is to see the BP readings
   move back above their respective 10-dmas.
3. The VIX needs to move through the 45 level (rather than 40,
   as I outlined in my original article) because of the steadily
   rising range of the VIX that I detailed in last weekend's LEAPS
   column.

As you can see, we still have a ways to go on all three of those
items.  So for now, bearish plays are still the way to go.  Just
be careful not to get caught in a near-term short-covering rally.
Over the near term, rallies are made to be sold, while selloffs
will provide good opportunities to harvest gains on profitable
short positions.

I hope that helps!


Mark


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SWING TRADER GAME PLANS
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What You See

Nothing really changed with today's weapons inspection report, or 
the U.S.'s response, but one thing is clear - the trend remains 
down.

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Contact Support
The Option Investor Newsletter                   Monday 01-27-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

Stop Loss Updates
Dropped Calls: OCR
Dropped Puts: None
Play of the Day: Put – KO


Updated on the site tonight:
Market Posture: Still Dropping
Market Watch: Low Tide


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

CTSH - put
Adjust from $61 down to $58.50


KSS- put
Adjust from $56 down to $54.50

CTAS- put
Adjust from $45.25 down to $44.01


*************
DROPPED CALLS
*************

OCR $24.73 -$1.01 (-1.01 for the week) Omnicare was a stalwart 
during the recent market swoon, holding its gains impressively 
over the last week.  That was until today. We kept a tight stop 
on this one, in case it did finally succumb to overall market 
pressure and that is exactly what happened today.  The trade 
below $25 took the stock below its rising trend line that started 
in the beginning of December.  Compared to the rest of the 
market, the stock still shows great relative strength, but the 
trend we were looking to capture simply could not maintain 
itself.  We will close this play and look for better 
opportunities on OI's new play list Tuesday.


************
DROPPED PUTS
************

None


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

KO - Coca-Cola $41.79 -1.04 (-1.04 for the week)

Company Description:
The Coca-Cola Company is the world's largest beverage company and 
is the leading producer and marketer of soft drinks. Along with 
Coca-Cola, recognized as the world's best-known brand, The Coca-
Cola Company markets four of the world's top five soft drink 
brands, including diet Coke, Fanta and Sprite. Through the 
world's largest distribution system, consumers in nearly 200 
countries enjoy The Coca-Cola Company's products at a rate of 
more than 1 billion servings each day. (source: company release)

Most Recent Write-Up:
KO has been fighting its long time support since gapping down 
following an earnings warning back in October.  The warning came 
just after the Dow began its climb from the 2002 low on October 
9. However, while the broad markets were challenging the yearly 
highs over the next couple of months, KO remained stuck in its 
new lower range, with a bottom at $43 and a top at $47.  that 
ceiling dropped from $47 to $46 following a downgrade to the 
stock and KO's announcement in mid-December that it would no 
longer give future guidance on a quarterly or yearly basis.  In 
addition, after confirming the previously given 2003 outlook, the 
company said it will not update that outlook as the year 
progresses. KO's statement that, " We believe that establishing 
short-term guidance prevents a more meaningful focus on the 
strategic initiatives that a Company is taking to build its 
business and succeed over the long-run" didn't fool anybody and 
the stock has remained mired in the low end of its 2002 range and 
testing the 2001 lows.  That is until now.  

KO finally broke its longtime support at $43 on a closing basis, 
trading down to $42.83.   It was the first close below $43 since 
June 2001.  The stock has traded just below $43 on an intraday 
several times, but has yet to crack the $42 barrier.  A trade of 
$42 would both create a new point and figure sell signal and also 
be the first time below that level since 1996.  A break below a 
support level more than 6 years old, combined with a stock market 
that recently broke down below a head and shoulders neckline, as 
the Dow did today, could be a recipe for a big drop.  The Dow's 
measuring objective from the neckline break is more than 600 
points below the current level and KO is likely to go along for 
the ride if it continues the current breakdown and gives us the 
long awaited sell signal at $42. For that reason, we will use an 
entry trigger on the short play of $41.90, with a target of $35 
to start.  However, with that support level being six years old, 
it may be an even steeper drop as buyers at that level are likely 
long gone. If we are triggered on the short entry, our stop will 
be placed initially at $45.10, just above the 21-dma ($44.52) and 
50-dma ($45.02). A failed bounce at either of these levels, after 
giving a sell-signal at $42, could be viewed as an alternative 
entry point for more conservative traders, and certainly offers a 
more favorable risk reward if that scenario plays out. 

Why We Like It:

KO gave us both the sell signal we were looking for on the PnF 
chart at $42 and also our entry trigger at $41.90.  As a Dow 
component, it has followed the broad market sell-off to its 
lowest levels on over 6 years and now sits just below our trigger 
point, thus giving traders plenty of opportunity to still jump 
in. It is certainly possible that KO will bounce if we get a 
rebound in the broad markets, given the recent dramatic sell-off. 
However, if the stock remains below its 21-dma ($44.40) and 50-
dma ($44.97), it will avoid reversing that PnF sell signal and a 
rollover from those levels would provide traders an ideal entry 
point.  If we instead head lower from here, aggressive traders 
can enter at current levels, while more conservative traders can 
wait for a round number support break below $40.  Our initial 
target remains $35. 

BUY PUT FEB-45 KO-NI OI= 7451 at $3.90 SL=1.95
BUY PUT MAR-45 KO-OI OI= 3775 at $4.40 SL=2.20

Average Daily Volume = 5.0 mil



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options,” claims author Larry Spears in his new compact guide book:  

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


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

Still Dropping

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/mp_012703.asp



************
MARKET WATCH
************

Low Tide

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/wl_012703.asp


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