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Daily Newsletter, Thursday, 02/06/2003

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The Option Investor Newsletter                Thursday 02-06-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Fear Returns to the Market
Futures Markets: (See Note)
Index Trader Wrap: (See Note)
Market Sentiment: Finally Got It...Sort of
Weekly Manager Microscope: Gus Sauter: Vanguard 500 Index Fund
(VFINX)


Updated on the site tonight:
Swing Trader Game Plan: Support Break


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      02-06-2003           High     Low     Volume   Adv/Dcl
DJIA     7929.30 - 55.90  7991.96  7881.30 1.69 bln 1155/2059
NASDAQ   1301.73 +  0.23  1310.51  1291.47 1.22 bln 1323/1891
S&P 100   423.49 -  2.52   426.01   420.38   Totals 2478/3950
S&P 500   838.15 -  5.44   844.23   833.25
W5000    7958.18 - 51.90  8017.95  7921.33
RUS 2000  364.74 -  2.25   368.15   363.86
DJ TRANS 2180.69 + 24.30  2195.97  2156.89
VIX        38.42 +  1.58    39.64    37.28
VXN        48.62 +  0.11    49.67    45.05
Total Volume 3,164B
Total UpVol  1,173B
Total DnVol  1.935M
52wk Highs  117
52wk Lows   241
TRIN       1.44
PUT/CALL   1.35
************************************************************

Fear Returns to the Market

The VIX is returning to 40 and the Put/Call ratio closed
the day at 1.35. The President held a press conference
and said time had run out for Iraq. Pressure is building
for action in Iraq and that same pressure is threatening
current support levels in the markets.

Dow Chart – Daily



Nasdaq Chart – Daily




The morning started with bad news from Jobless Claims again.
The headline number was 391,000 and again very close to the
critical 400,000 level. The bad news was a revision of last
weeks number to 402,000, up from 397,000. Anything above
350,000 represents a declining job market. Considering the
+42% increase in announced layoffs in January the Jobless
Claims numbers should continue to grow.

With jobless claims hovering near 400,000 the Jobs Report
on Friday could have a negative surprise again. Last month
the expectations were for a gain of +37,000 jobs and the
actual number came in with a loss of -101,000. A serious
deficit. This month analysts are expecting a gain of +60,000.
This sets up a real potential for another negative event.

Also surprising traders was a drop in Productivity, the
hallmark of the recovery according to Greenspan, by -0.2%
and well under expectations. Unit labor costs also soared
+4.8%. This was the final number for the fourth quarter
and shows that the economic weakness in the closing days
of 2004 was weaker than originally thought. This shows the
weaker production load from slowing orders. Capacity is
there but demand is absent. Companies are continuing to
cut excess workers but minimums are required to keep
production lines open. Tough times still exist in the
manufacturing sector.

Chain Store sales for the full month of January rose slightly
by +1.8% but department stores dropped -3.9%. Drug stores
rose the most with +5.8% gains. Unfortunately there are
a lot more items and economic dollar volume in department
stores and they have a greater impact on the economy. Despite
the weak sales WMT, JCP and GPS raised earnings guidance
with Sears lowering guidance due to credit card defaults.

Echoing the Cisco comments earlier in the week Dell's COO
used the Iraq ate our orders excuse and said technology
spending would be weak this year due to Iraq and the
economy. He said the economy more than anything else was
weighing on spending and the war just made more people
skittish. He said 2003 would be a difficult year. That
did not depress the Nasdaq futures for more than a few
minutes but then what did he say that everyone did not
already know?

EDS warned after the close that revenue and earnings would
suffer for 2003 and reported a -11% drop in revenue for the
4Q. The CFO said they were taking a very guarded view for
2003. He said that even without extended military action
against Iraq, overall market conditions are not expected
to recover through the first half. They cut Q1 expectations
to 30-35 cents and well below analyst's estimates of 43
cents.

Returning to center stage was North Korea with warnings
that the US is not the only country that could make
preemptive attacks. They warned that any threats against
North Korea would be taken as acts of war and could prompt
a devastating preemptive attack by North Korea. Even though
NK is a "pauper" tiger it is a tiger with claws and it is
holding South Korea hostage. Their method of negotiating
is to talk a big bluff and attempt to attract a bribe
to back off the threats. The US is not worried specifically
about any material threat from NK against the US but they
also cannot let the threat stand. The US sent the carrier
battle group Carl Vincent to station 200 miles offshore
from NK. The carrier group is carrying a large contingent
of attack and reconnaissance aircraft. Some fear this
escalation of force in the eyes of NK could ratchet up
their threats as well. What a wonderful world!

The US government also issued another terrorist alert and
warned that an increased level of communication intercepts
were pointing to the possibility of multiple terrorist
attacks over the next three weeks. The said the attacks
could be timed to the end of the Muslim holy days after
Feb-12th and the possible start of an Iraq war. They think
attacks are necessary to show they are bringing the war
to us instead of just waiting for us to bomb Iraq. Owning
a house in the country is looking more attractive every
day.

Last month was the first January since the 1990 that had a
net redemption from stock funds. This is normally a heavy
inflow month as holiday bonuses and retirement contributions
pour into retirement accounts. Investors are worried that
there is still trouble in our future and they are moving
dollars to bond funds and money markets despite the very
low yields. Overseas investors are pulling money out due
to the falling dollar and anti-American war sentiment.
This pushed the Put/Call ratio to a high close at 1.35,
which shows growing fear in the marketplace.

The Dow hit another milestone today with its break below
7900. The first dip was quickly met with bargain hunting
buyers but they were unable to get close to the 8000 level
again. After the initial bounce there was a series of
repeated attempts to recover but each met resistance at
a lower level and eventually traders gave up. The index
dropped below 7900 again just before the close but managed
to recover slightly on short covering.

The Nasdaq was probably the only reason we are not at 7700
tonight. It stubbornly refused to give up the 1300 level
and finished with a fractionally positive close. The 1295
level is proving to be strong support but the Dell and EDS
comments after the bell today could spell an end to this
stronghold.

It is amazing to me that with the North Korea threat, the
terrorist alert and the tech profit warnings that the
S&P and NDX futures are positive at 7:30PM. Add to that
the very real possibility that the Jobs Report will be
negative again and I think a lot of traders must be on
drugs and I am not talking about Viagra. I can only guess
at the monster spike we would see if Saddam decided to
retire to Libya. If that happens I am backing up the truck.
Until then I am still concerned that there is more risk to
the downside ahead of us. The Dow tested a very critical
level today of 7907 which is the 61.8% retracement level
from the October low to the December high. A failure of
this level should be followed by a retest of the 78%
retrace at 7592 and likely very soon. That 1300 level
on the Nasdaq is also critical. Should that level
fail there is only two real speed bumps at 1266 and
1196 before retesting the October lows near 1100.

This market, despite the recent support at the current
levels, is very fragile. If we had a single terrorist
event on US soil or shots fired in North Korea we could
be in free fall in a heartbeat. Everyone is primed to
buy but they are waiting on the sidelines for the signal
once the war starts. Until then the negative event risk
is huge. Short of retirement by Saddam we should be headed
lower.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Check the Site Later Tonight For John’s Index Trader Article
http://members.OptionInvestor.com/futureswrap/fw_020603_1.asp



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

Check the Site Later Tonight For Jeff’s Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_020603_1.asp


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


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

Finally Got It...Sort of
by Steve Price

We just about got our range breakout.  Just about.  In fact, we
got enough of a rollover to do some real technical damage, but
once again found bids on the downside that left us back between
the lines. I have highlighted the recent ranges in the Dow (7900-
8150), SPX (840-865) and OEX (424-438) in the last couple of
columns.  Those ranges had held strong for the last eight
sessions.  That changed this morning, with those broader indices
giving their almost daily point and figure reversals, this time
back into a bearish column of "O."  Maybe more importantly, they
all reversed lower far enough to give triple bottom point and
figure sell signals beneath those recent support levels.

In the past week, each reversal has been an indicator to take
contrarian action.  Buying the reversals down and selling the
reversals up would have turned out some nice profits for traders
willing to step up and buy support and sell resistance.  However,
this morning was different in the sense that we actually got the
triple bottom sell signal (actually a quad bottom, but that is
not actually an official designation).   We did attempt a rebound
with an intraday bounce, but that bounce failed at a much lower
level than we have seen over the past week, adding to bearish
sentiment with a lower high.   By the end of the day, we once
again took out the morning lows before catching another bounce.

One possibility that we need to be aware of is the bear trap.  A
bear trap is a one-box violation of the triple bottom that turns
back up immediately into a big rally.  An additional downside bow
is generally regarded as a move beyond the bear trap, reducing
the chances of a big bounce.  The SPX gave us that second box,
while the Dow and OEX have yet to do so.   Still, the support
levels that have held us for the past eight sessions finally gave
way and things look anything but bullish.  In fact, the last
rally created a triple-bottom in the OEX that had previously been
a double bottom on the last support test.  That triple bottom in
all three increases the bearish probabilities, giving all three
indices similar risk profiles.

The fly in the ointment in all of this bearishness is the Nasdaq
Composite.  In spite of what seems like a broad market sell-off,
the COMP continues to hold support on a closing basis at 1300.
It closed today at 1301.73, its third straight day of recovering
from sub-1300 moves to close above that support.   This pattern
of recovery actually looks similar to what it did 20 points
higher, when it was testing its November pullback low at 1319,
following what appears to be the left shoulder of a bearish head
and shoulders formation.  The last few days of January found the
COMP testing that 1319 support for six straight days before
finally giving in and dropping down to 1300.   Essentially, we
are still seeing a ratcheting down, but until the techs drop, it
will be tough to get the big market-wide sell-off from these
levels after already dropping hard the last two weeks of January.

Another contrarian indicator that has been stretched and is once
again flirting with resistance is the Market Volatility Index
(VIX), which measures implied volatility levels of at the money
options in the OEX.  The indicator generally rallies on market
drops and falls on market rallies or slowdowns and is reflective
of the level of fear in the marketplace. .  After consolidating
for the last several days, the VIX had fallen from a test of 40
on the previous market drop, all the way below 35, which was its
previous resistance level on the market drops in November and
December.  That 35 level had acted as brief support over the last
week and a half, finally giving in on February 3.  Now that we
are back above that level (closing today at 38.52), we are seeing
resistance again at 40, with a high today of 39.64.   Those
traders using this measure as a contrarian indicator will view
its approach to resistance as bullish indicating it's time for a
bounce.  However, it seems a more likely scenario, following
today's technical breakdowns, would be a move above 40 indicating
more room for equities to fall.  The current point and figure
bearish vertical count on the Dow is 7600, but that is derived
from the current column of "O" and could go lower.  In any case,
the fulfillment of that objective would approach the July lows,
when the VIX traded up to 56.74 at its peak.  If we do continue
to get a breakdown in the broader markets, traders can watch for
the VIX to stretch back into the 50s as we approach either the
July or October lows in the broader markets.  At those points, we
will be at recent market extremes and it may be time for shorts
to tighten up the stops and be ready to take profits on a
reversal.

We are certainly still in a high-risk environment when any
development on the global front can lead to big intraday
reversals.  Part of the reason for today's drop could have been
North Korea's statements that any pre-emptive action by the U.S.
against its nuclear facilities would lead to full-scale war,
which came one day after the country announced it was restarting
its nuclear power plant in Yongbyon.  Any development the market
views as favorable out of North Korea or Iraq could certainly
turns us around in a hurry.  The opposite is also true.  I still
believe traders should be playing with risk capital only in the
current environment and until the geo-political environment
stabilizes that will continue to be the case.

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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  7929

Moving Averages:
(Simple)

 10-dma: 8035
 50-dma: 8488
200-dma: 8759



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  838

Moving Averages:
(Simple)

 10-dma:  852
 50-dma:  896
200-dma:  928



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     :  970

Moving Averages:
(Simple)

 10-dma:  986
 50-dma: 1035
200-dma: 1029



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

Market Volatility

As I mentioned above, we are back above 35% and testing 40% again
to the upside.  A close over 40 would be a signal that
institutions are in a premium buying mode, as opposed to selling
resistance.  That would tell me the big boys see more downside
and since their book is a lot bigger than mine, I'll go along for
the ride when that happens. Those straddles are getting more
expensive, and the daily time decay is getting more expensive.
However, if we head lower, the decay will more than be made up
for by the movement and the implied volatility increase.  If the
opposite happens and we stabilize, or head higher, straddle
owners should not be so worried about hitting bids and closing
out, as they will quickly melt in a rebounding market.

CBOE Market Volatility Index (VIX) = 38.52 +1.68
Nasdaq-100 Volatility Index  (VXN) = 48.62 +0.11

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

The Retail Index (RLX.X):  The retailers got a boost to start the
day as Wal-Mart guided higher for the full year 2003.  That
raised guidance was mirrored by JCP, ANN, PSUN, TLB, SHRP and
STGS.  On the flip side was disappointing same-store sales for
the month of January that came in below expectations for many
retailers, including Wal-Mart.  Sears not only saw a greater than
expected same-store sales decline, but also warned on earnings
for the first quarter.  Sears fell $2.23 on the day.   When all
was said and done, the RLX couldn't fight the sinking market tide
and continued its downward trend, losing just under a point on
the day.   We are just under the 250 support level and not far
from the October intraday low just under 245.  Until we see a
trend reversal in the index, traders should be careful about
picking longs in the sector.

52-week High: n/a
52-week Low : 244
Current     249

Moving Averages:
(Simple)

 21-dma: 259
 50-dma: 269
200-dma: 295

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

          Put/Call Ratio  Call Volume   Put Volume

Total          1.35        468,524       632,174
Equity Only    1.27        354,623       445,709
OEX            1.37         25,580        35,117
QQQ            1.79         14,455        25,908


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

Bullish Percent Data

           Current   Change   Status
NYSE          44.3    - 1     Bull Correction
NASDAQ-100    43.0    - 1     Bear Confirmed
Dow Indust.   26.7    - 0     Bear Confirmed
S&P 500       43.4    - 1     Bull Correction
S&P 100       40.0    - 1     Bear Confirmed

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  1.47
10-Day Arms Index  1.49
21-Day Arms Index  1.39
55-Day Arms Index  1.33


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        989          1863
NASDAQ     1249          1805

        New Highs      New Lows
NYSE        59               93
NASDAQ      48               85

        Volume (in millions)
NYSE       1,656
NASDAQ     1,195


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


Commitments Of Traders Report: 01/28/02

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 and short positions, ending up with a
net short increase of 4,500 contracts.  Small traders took the
opposite approach, reducing both positions, but ending up with a
net increase of 4,300 long contracts.

Commercials   Long      Short      Net     % Of OI
01/07/03      411,542   455,538   (43,996)   (5.1%)
01/14/03      411,052   453,164   (42,112)   (4.9%)
01/21/03      415,028   456,885   (41,857)   (4.8%)
01/28/03      422,232   468,586   (46,354)   (5.2%)

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
01/07/03      143,169    83,895    59,274     26.1%
01/14/03      144,182    92,358    51,824     21.9%
01/23/03      148,227    95,356    52,871     21.7%
01/28/03      142,734    85,567    57,167     25.0%

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 virtually unchanged, with a net
reduction of 1,300 short contracts.  Small traders Small traders
 left the long side unchanged, while reducing shorts by 800
 contracts.


Commercials   Long      Short      Net     % of OI
01/07/03       37,966     48,156   (10,190) (11.8%)
01/14/03       38,057     45,060   ( 7,003) ( 8.4%)
01/23/03       37,174     49,789   (12,615) (14.5%)
01/28/03       37,955     49,321   (11,366) (13.0%)

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
01/07/03       19,708     8,453    11,255    40.1%
01/14/03       20,757     8,320    12,437    42.8%
01/23/03       25,852     6,764    19,088    58.5%
01/28/03       25,814     7,576    18,238    54.6%

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:  19,088  - 01/21/02

DOW JONES INDUSTRIAL

Commercials reduced the overall long position by 1,400 contracts,
while small traders reduced the net short by 200 contracts.

Commercials   Long      Short      Net     % of OI
01/07/03       16,210    11,333    4,877      17.7%
01/14/03       17,804    12,427    5,377      17.8%
01/23/03       16,901    11,031    5,870      21.0%
01/28/03       16,013    11,574    4,439      16.1%

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
01/07/03        4,963     8,334    (3,371)   (25.4%)
01/14/03        4,552     7,697    (3,145)   (25.7%)
01/23/03        5,120     8,282    (3,162)   (23.6%)
01/28/03        4,838     7,836    (2,998)   (23.7%)

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

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


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*************************
WEEKLY MANAGER MICROSCOPE
*************************

Gus Sauter: Vanguard 500 Index Fund (VFINX)

This week, we revisit George Sauter, the Vanguard Group's master
of indexing, to see how well the Vanguard 500 Index Fund (VFINX)
has performed relative to other equity funds through the market
downturn.  The Vanguard Group has managed the Vanguard 500 Index
Fund since the fund's inception in 1976.

Sauter has been in investment management since 1985, joining the
Vanguard Group in 1987.  Since 1987, he has managed the Vanguard
500 Index Fund since 1987.  Today, he's a managing director with
the Vanguard Group and the head of their index management effort.
Sauter earned a B.A. Degree from Dartmouth College and his M.B.A.
Degree from the University of Chicago.

The nation's oldest and largest index fund with $75.3 billion in
total net assets seeks investment results, which correspond with
the price and yield performance of the S&P 500 Index.  Sauter in
the management of the fund employs a passive management strategy
designed to track the performance of the S&P 500 Index, which is
dominated by the stocks of large U.S. companies.

Sauter attempts to replicate the target index by investing all or
substantially all of its fund's assets in the stocks that make up
the S&P 500.  As Morningstar's report points out, Sauter tries to
add value on the margins also by opportunistically buying futures
contracts, among other techniques.  And, Sauter strives to reduce
trading costs of the fund, making it about as efficient a fund as
there is today in the retail marketplace.

Key Fund Characteristics

At December 31, 2002, the Vanguard 500 Index Fund held 505 stocks
in its portfolio.  The fund's median market capitalization at the
year-end date was $47 billion, with an average P/E ratio of 21.7x
and an average P/B ratio of 2.7x.  It also sported an average ROE
of 23.2% and an earnings growth rate of 7.3%.  Those numbers land
it squarely in the Morningstar large-cap blend style box where it
has been categorized historically by the funds tracker.

Total fund assets were $72.3 billion including all share classes,
per Morningstar.  The fund's trailing yield of 1.72% exceeds that
of many stock funds, providing some dividend income to investors.
At year-end 2002, the fund's 10 largest holdings were as follows:

 Vanguard 500 Index Fund 10 Largest Holdings:
 Microsoft Corp.
 General Electric Co.
 ExxonMobil Corp.
 Wal-Mart Stores, Inc.
 Pfizer, Inc.
 Citigroup, Inc.
 Johnson & Johnson
 American International Group, Inc.
 International Business Machines Corp.
 Merck & Co., Inc.

Microsoft and GE, the fund's two largest holdings, comprise just
3% of assets each, so the Vanguard 500 Index Fund is diversified
across hundreds of individual common stocks, providing broad U.S.
market exposure.  Holdings are essentially the 500 stocks of the
S&P 500 held in the same proportion as their weight in the index.
Therefore, investors share proportionately in the net income and
in the capital gains and losses of the fund's portfolio.

The strategy is simple, straightforward, and very cost effective,
giving the Vanguard 500 Index Fund a decisive cost-advantage over
other equity mutual funds.  At just 0.18%, the Vanguard 500 Index
Fund's expense ratio is among the lowest in the retail market and
low compared with the average large-cap blend fund (0.66%).  At 4
percent, the fund's turnover rate is also ultra low in comparison
with the general stock fund universe.

In the next section, we see how well Sauter's passive approach to
equity investing has fared over different time periods, beginning
with the fund's short-term performance.

Fund Performance

Since December 31, 2002, the Vanguard 500 Index Fund has lost 4.0
percent, ranking in the middle of the Morningstar large-cap blend
category.  However, as you increase the time period to 1 year, to
5 years, and to 10 years, the fund's skilled management, low-cost
advantage, and efficiency become more apparent.  Below is a total
return summary for the trailing 1-year and 5-year periods through
February 5, 2003 and the trailing 10-year period through December
31, 2002.

 1-Year Total Return:
 -21.3% Vanguard 500 Index Fund (VFINX) 42nd Percentile

 5-Year Annualized Total Return:
 -2.1% Vanguard 500 Index Fund (VFINX) 36th Percentile

 10-Year Annualized Total Return:
 +8.9% Vanguard 500 Index Fund (VFINX) 19th Percentile

While the 10-year number is no longer in double-digit percentage
terms, it still represents domination over the large-blend group,
with the fund ranking in the category's top quintile.  Using the
N.Y. Times website (www.nytimes.com), you can view the fund's 15-
year average annual total return.  For that period, the Vanguard
500 Index Fund returned an average of 10.9% a year for investors.
Since Sauter has managed the fund since 1987, the fund's superior
15-year return is associated fully with him.

As outstanding as Sauter's 15-year record is the fund's inception
to date performance record.  Since the fund's inception on August
31, 1976, it has amassed an impressive 11.7% average annual total
return for shareholders, per the NYTimes.com website.  Mr. Sauter
adds value on the margins and actively attempts to reduce trading
costs, two behind-the-scenes activities that earn this stock fund
a Morningstar 4-star overall rating for risk-adjusted performance
relative to its category peer group (large-blend funds).

The Vanguard 500 Index Fund doesn't outperform in all markets and
in all short-term periods, but it does make a compelling case for
the core component for one's long-term investment plan.  Sauter's
passive approach generated annual returns of 22.9% in 1996, 33.2%
in 1997, 28.6% in 1998, and 21.1% in 1999, beating roughly 90% of
the stock funds on the market.  In 2000, Sauter's fund lost 9.1%,
ranking in the 60th percentile of the Morningstar large-cap blend
category.

Although the fund posted losses in 2001 and 2002, its losses were
less than the average large-cap blend fund, ranking in the second
quartile of the category.  In the last seven years, Sauter's fund
has ranked in the category's top two quartiles six times with the
year 2000 being the only exception.  So, consistency and strength
of performance are two of the hallmarks of the Vanguard 500 Index
Fund.

This Lipper Leader for consistent strong performance and low fund
expense, believe it or not got off to a slow start.  In its early
days, the strategy underperformed other mutual funds.  From 1977
to 1979, the Vanguard index fund ranked in the bottom quartile of
funds.  Then, in 1983, the fund put up a 21 percent annual return
for investors, beating the competition and never looking back, as
the story goes.  Since 1987, Sauter has skillfully guided the 500
portfolio, adding enough value at the margins to keep the fund on
par with the total return of the S&P 500 index.

Conclusion

Vanguard 500 Index Fund's assets swelled from 1995 to 1998, when
the fund outpaced roughly 90 percent of the equity fund universe.
Today, the fund has about $72.3 billion in assets, making it the
largest equity mutual fund in the country, ahead of the Fidelity
Magellan Fund.

The Vanguard 500 Index Fund won't outperform the average domestic
stock fund in all markets and all time periods.  At times, small
company stocks or foreign stocks may dominate and U.S. large-cap
stocks may lag.  Value-driven funds may sometimes beat the index,
while at other times, growth-oriented styles may be in sync with
the investors.

However, Sauter's disciplined passive management approach has in
the long run generated strong investment results relative to the
equity fund universe.  Some of that is Vanguard's cost advantage
and some is attributable to Sauter's skilled management over the
years.

While providing exposure to stocks of companies with large market
capitalizations, the Vanguard 500 Index Fund doesn't provide 100%
market exposure, keep that in mind.  Mid-cap and small-cap stocks
comprise another 30% of the total value of all U.S.-traded common
stocks.  Therefore, you may wish to add a mid-cap stock or small-
cap stock fund to compliment this core equity fund position.  For
more information or to download a prospectus, go to the Vanguard
website at www.vanguard.com.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com
Gus Sauter: Vanguard 500 Index Fund (VFINX)

This week, we revisit George Sauter, the Vanguard Group's master
of indexing, to see how well the Vanguard 500 Index Fund (VFINX)
has performed relative to other equity funds through the market
downturn.  The Vanguard Group has managed the Vanguard 500 Index
Fund since the fund's inception in 1976.

Sauter has been in investment management since 1985, joining the
Vanguard Group in 1987.  Since 1987, he has managed the Vanguard
500 Index Fund since 1987.  Today, he's a managing director with
the Vanguard Group and the head of their index management effort.
Sauter earned a B.A. Degree from Dartmouth College and his M.B.A.
Degree from the University of Chicago.

The nation's oldest and largest index fund with $75.3 billion in
total net assets seeks investment results, which correspond with
the price and yield performance of the S&P 500 Index.  Sauter in
the management of the fund employs a passive management strategy
designed to track the performance of the S&P 500 Index, which is
dominated by the stocks of large U.S. companies.

Sauter attempts to replicate the target index by investing all or
substantially all of its fund's assets in the stocks that make up
the S&P 500.  As Morningstar's report points out, Sauter tries to
add value on the margins also by opportunistically buying futures
contracts, among other techniques.  And, Sauter strives to reduce
trading costs of the fund, making it about as efficient a fund as
there is today in the retail marketplace.

Key Fund Characteristics

At December 31, 2002, the Vanguard 500 Index Fund held 505 stocks
in its portfolio.  The fund's median market capitalization at the
year-end date was $47 billion, with an average P/E ratio of 21.7x
and an average P/B ratio of 2.7x.  It also sported an average ROE
of 23.2% and an earnings growth rate of 7.3%.  Those numbers land
it squarely in the Morningstar large-cap blend style box where it
has been categorized historically by the funds tracker.

Total fund assets were $72.3 billion including all share classes,
per Morningstar.  The fund's trailing yield of 1.72% exceeds that
of many stock funds, providing some dividend income to investors.
At year-end 2002, the fund's 10 largest holdings were as follows:

 Vanguard 500 Index Fund 10 Largest Holdings:
 Microsoft Corp.
 General Electric Co.
 ExxonMobil Corp.
 Wal-Mart Stores, Inc.
 Pfizer, Inc.
 Citigroup, Inc.
 Johnson & Johnson
 American International Group, Inc.
 International Business Machines Corp.
 Merck & Co., Inc.

Microsoft and GE, the fund's two largest holdings, comprise just
3% of assets each, so the Vanguard 500 Index Fund is diversified
across hundreds of individual common stocks, providing broad U.S.
market exposure.  Holdings are essentially the 500 stocks of the
S&P 500 held in the same proportion as their weight in the index.
Therefore, investors share proportionately in the net income and
in the capital gains and losses of the fund's portfolio.

The strategy is simple, straightforward, and very cost effective,
giving the Vanguard 500 Index Fund a decisive cost-advantage over
other equity mutual funds.  At just 0.18%, the Vanguard 500 Index
Fund's expense ratio is among the lowest in the retail market and
low compared with the average large-cap blend fund (0.66%).  At 4
percent, the fund's turnover rate is also ultra low in comparison
with the general stock fund universe.

In the next section, we see how well Sauter's passive approach to
equity investing has fared over different time periods, beginning
with the fund's short-term performance.

Fund Performance

Since December 31, 2002, the Vanguard 500 Index Fund has lost 4.0
percent, ranking in the middle of the Morningstar large-cap blend
category.  However, as you increase the time period to 1 year, to
5 years, and to 10 years, the fund's skilled management, low-cost
advantage, and efficiency become more apparent.  Below is a total
return summary for the trailing 1-year and 5-year periods through
February 5, 2003 and the trailing 10-year period through December
31, 2002.

 1-Year Total Return:
 -21.3% Vanguard 500 Index Fund (VFINX) 42nd Percentile

 5-Year Annualized Total Return:
 -2.1% Vanguard 500 Index Fund (VFINX) 36th Percentile

 10-Year Annualized Total Return:
 +8.9% Vanguard 500 Index Fund (VFINX) 19th Percentile

While the 10-year number is no longer in double-digit percentage
terms, it still represents domination over the large-blend group,
with the fund ranking in the category's top quintile.  Using the
N.Y. Times website (www.nytimes.com), you can view the fund's 15-
year average annual total return.  For that period, the Vanguard
500 Index Fund returned an average of 10.9% a year for investors.
Since Sauter has managed the fund since 1987, the fund's superior
15-year return is associated fully with him.

As outstanding as Sauter's 15-year record is the fund's inception
to date performance record.  Since the fund's inception on August
31, 1976, it has amassed an impressive 11.7% average annual total
return for shareholders, per the NYTimes.com website.  Mr. Sauter
adds value on the margins and actively attempts to reduce trading
costs, two behind-the-scenes activities that earn this stock fund
a Morningstar 4-star overall rating for risk-adjusted performance
relative to its category peer group (large-blend funds).

The Vanguard 500 Index Fund doesn't outperform in all markets and
in all short-term periods, but it does make a compelling case for
the core component for one's long-term investment plan.  Sauter's
passive approach generated annual returns of 22.9% in 1996, 33.2%
in 1997, 28.6% in 1998, and 21.1% in 1999, beating roughly 90% of
the stock funds on the market.  In 2000, Sauter's fund lost 9.1%,
ranking in the 60th percentile of the Morningstar large-cap blend
category.

Although the fund posted losses in 2001 and 2002, its losses were
less than the average large-cap blend fund, ranking in the second
quartile of the category.  In the last seven years, Sauter's fund
has ranked in the category's top two quartiles six times with the
year 2000 being the only exception.  So, consistency and strength
of performance are two of the hallmarks of the Vanguard 500 Index
Fund.

This Lipper Leader for consistent strong performance and low fund
expense, believe it or not got off to a slow start.  In its early
days, the strategy underperformed other mutual funds.  From 1977
to 1979, the Vanguard index fund ranked in the bottom quartile of
funds.  Then, in 1983, the fund put up a 21 percent annual return
for investors, beating the competition and never looking back, as
the story goes.  Since 1987, Sauter has skillfully guided the 500
portfolio, adding enough value at the margins to keep the fund on
par with the total return of the S&P 500 index.

Conclusion

Vanguard 500 Index Fund's assets swelled from 1995 to 1998, when
the fund outpaced roughly 90 percent of the equity fund universe.
Today, the fund has about $72.3 billion in assets, making it the
largest equity mutual fund in the country, ahead of the Fidelity
Magellan Fund.

The Vanguard 500 Index Fund won't outperform the average domestic
stock fund in all markets and all time periods.  At times, small
company stocks or foreign stocks may dominate and U.S. large-cap
stocks may lag.  Value-driven funds may sometimes beat the index,
while at other times, growth-oriented styles may be in sync with
the investors.

However, Sauter's disciplined passive management approach has in
the long run generated strong investment results relative to the
equity fund universe.  Some of that is Vanguard's cost advantage
and some is attributable to Sauter's skilled management over the
years.

While providing exposure to stocks of companies with large market
capitalizations, the Vanguard 500 Index Fund doesn't provide 100%
market exposure, keep that in mind.  Mid-cap and small-cap stocks
comprise another 30% of the total value of all U.S.-traded common
stocks.  Therefore, you may wish to add a mid-cap stock or small-
cap stock fund to compliment this core equity fund position.  For
more information or to download a prospectus, go to the Vanguard
website at www.vanguard.com.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

Support Break

What a difference a day makes. Yesterday I highlighted the range
that had held the Dow, SPX, and OEX for the past eight sessions.
No sooner said than broken.


To read the rest of the Swing Trader Game Plan Click here:
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The Option Investor Newsletter                 Thursday 02-06-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: None
Dropped Puts: IDPH, CEPH
Daily Results
Call Play Updates: EBAY, SYMC
New Calls Plays: None
Put Play Updates: CCMP, AT, PNRA
New Put Plays: GWW, AZO


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

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


CALLS:
*****

None


PUTS:
*****

IDPH  $30.71 -0.27 (-1.37 for the week) We listed IDPH with an
entry trigger at $30, which would confirm the current triple-
bottom point and figure breakdown and get us past the bear-trap
scenario.  We still haven't gotten that breakdown and it appears
as though round number support at that level is preventing the
breakdown.   For the more aggressive traders who chose to enter
the play on the triple bottom at $31, the stock does not appear
to be in danger of a rebound, it simply isn't going as planned in
a sinking market, following the stagnation of the Biotech Index
(BTK.X).  Had we been triggered, we'd probably hold the play, but
two days later we are still sitting on our hands.  Therefore we
will let it go for the time being and consider re-entry if it
breaks $30.  For those holding the play or keeping the trigger in
place, a break below $30 could be a signal to initiate put
positions, and if the stock remains just above, we'll consider
adding to the watch list for the breakdown.

---

CEPH $50.43 +2.32 (-3.90) After obediently drifting lower with
the rest of the Biotech sector, something strange happened to our
CEPH play yesterday.  Not only did it buck the broad market
trend, it did so with gusto, reversing an early loss and plowing
through resistance at $47, and then $48 on heavy volume.  That
didn't look good, and we got the explanation this morning before
the open, when JP Morgan upped the stock from Neutral to
Overweight.  CEPH gapped up, tripped our stop and quickly scaled
the $50 level, before drifting sideways for the remainder of the
day.  There's no question this play caught us unawares and we'll
chalk it up as a loser.


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

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

CALLS              Mon    Tue    Wed   Thu  Week

EBAY     73.16   -1.25  -0.94  -0.08 –0.37  A few bids
SYMC     46.54   -0.68  -0.40  -0.42 –0.34  Relative Strength


PUTS

AT       45.13    0.00  -1.04  -0.36 –0.48  New Lows
AZO      64.00   -0.01  -0.35  -0.15 –1.59  New, Failed Rebound
CCMP     43.14   -1.27   0.04  -0.14 –0.43  SOX rollover
IDPH    30.71    0.33  -1.70   0.08 –0.27   Drop, look for $30
GWW      46.00    0.30  -0.15   0.08 –0.63  New, Room below
CEPH     50.48   -0.40   0.18   1.58  2.37  Drop, Upgrade fever
PII      48.80   -0.79  -1.20  -0.21 –0.50  Failed $50 bounce
PNRA     27.84    0.08  -0.77  -0.25 –0.95  Gave up $28


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

EBAY $ 73.15 -0.38 (-2.00 for the week) Much like the NASDAQ,
EBAY traded with no clear direction on Thursday.  We've collared
this play with two different entry strategies, but thus far the
stock hasn't broken out of the $72-$75 range.  Yesterday a mid-
session rally took EBAY to a high of $74.63.  Shares have since
been marching steadily lower without breaking down towards the
rising 50-dma at $71.09.  On Tuesday we set an alternate plan of
action to enter this play on a rebound from that moving average.
If shares bounce from the 50-dma and move above $71.25, we'll
activate the long play with a stop at $69.94.  Our objective for
will be to ride EBAY back to the $75-$76 area."  We're keeping
that plan in place, as well as our original upside trigger at
$75.51.  More sideways trading might prompt us to drop the un-
triggered play and turn our attention to stocks that are seeing
more movement.

---

SYMC $46.53 -0.35 (-0.15) Thursday's session was one of the
weirdest in recent memory as program trades had the major
indices slapped around by competing Buy and Sell programs.  In
that kind of environment, bullish traders will look for any
pocket of relative strength and once again SYMC provided it.
Oh there wasn't any strong bullish move, but the stock
stubbornly held onto above the $46 level all day after the
opening dip to $45.95.  After clearing the $47 resistance level
early in the week, SYMC surged all the way to $48.27 yesterday
before weakening into the close.  That was a significant
rejection at resistance, as there just wasn't enough buying
conviction to push through that $48.30 high from January 16th.
Traders looking to buy a breakout over that level need to be
very careful, as SYMC hasn't been able to sustain any breakout
moves without first pulling back to test support.  For that
reason, we continue to focus on buying the intraday dips to
support.  The $46 level still appears to be providing support
and that is where we want to target entry.  Stops should be
maintained at $45, just below last Friday's intraday low


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

None


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

CCMP - $ 43.14 -0.43 (-0.76 for the week) Talk about indecision!
The NASDAQ traded in a narrow 19-point range on Thursday before
finishing basically unchanged.  The SOX.X (semiconductor index)
didn't fare so well with its 1.4% decline. While this move didn't
produce any significant technical damage, it does look like
support at 260 might soon be tested.  A violation of this level
could send the index tumbling another 20 points to the 240 area.
That could be just the catalyst we need for a breakdown in Cabot.
The stock managed to rally with the NASDAQ on Wednesday but was
turned back below the 200-dma.  Today's action saw CCMP follow
the SOX.X into negative territory while remaining well above the
relative low of $42.57.  Traders looking for new entries can
continue to watch for a move under that level.  Other than
psychological support at $40.00, we see no major obstacles for
the bears until the $33-$35 region.  At this point we're going to
lower our stop-loss to $45.51, ten cents above the 200-dma.
Longer-term traders may want to maintain a stop above the 100-dma
at $46.83

---

AT $45.96 -1.04 (-0.91) Lower lows and lower highs have been the
name of the game for our AT play, as the Northern Telecom index
(XTC.X) continues to drift lower along its 200-dma.  While AT
has continued to move a bit lower each day, it is somewhat
disconcerting that the XTC index hasn't broken down.  At the
close of trading on Thursday, this index closed just below the
200-dma ($430.81), but we need to be on the lookout for another
rebound attempt like we saw following the January 30th break of
the 200-dma.  The other important thing to be aware of is that
AT is sitting just above its $44 PnF bullish support line, also
the site of solid historical support.  For that reason, we want
to wait for failed rallies before entering new positions.
Yesterday's failed rebound near the $46.50 level was about the
best opportunity we've seen all week, and another failed rebound
below that level (possibly closer to $46) should be a good spot
to enter the play.  Lower stops to $47.50, just above both the
200-dma and Monday's intraday high.

---

PII $48.80 -0.50 (-2.76) That's exactly why we didn't want to
chase PII lower after the long decline the stock has already
seen.  Following yesterday's consolidation day, the stock
plunged briefly below $48 this morning, found support and then
rebounded more than $2 before rolling over at the $50 level.
Thursday's pullback from the $50 level makes the second solid
rejection at this level in the past two days.  Today's
large-range Doji hints at indecision, so ideally we'll get
another pop to resistance to provide a solid entry into the play.
Another rollover near $50 can be used for new entries, although
a pop up to $51 and subsequent rollover would provide an even
better entry point.  Throughout the recent decline, rally
attempts have continually been rejected at the declining 10-dma
($51.14) and this average should continue to provide solid
resistance.  With the pattern of lower highs and lower lows
continuing, we can now lower our stop to $52, just above
Monday's high.

---

PNRA $27.84 -0.95 (-1.58) For a few days there, it was looking
like PNRA was just going to grind its way gradually lower until
it finally reached the $28 support level and bounced.  Well,
sort of.  The stock plunged at the open with the rest of the
market, before finding some support just above $28.  There wasn't
much of a bounce after that and the bottom fell out in the final
hour, driving PNRA down to close just off its low of the day,
below $28.  So where do we go from here?  With our eventual
target of $26, it doesn't make sense to enter new positions on a
further deterioration in price.  Rather, it is time to manage
those open positions.  A decline to below $27 should have those
stops being tightened up and gains should be harvested as we
approach the $26 level.  Should we be so lucky as to get another
failed rebound below the $29 level, it can be used for opening
new positions, but don't expect more than a $2-3 move before
taking gains.  We're lowering our stop to $29.50 tonight, just
above the bottom of Tuesday's gap.


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

GWW - Grainger Inc. - $46.00 -0.63 (-1.30 FOR THE WEEK)

Company Description:
W.W. Grainger, Inc, with 2001 sales of $4.8 billion, is the
leading North American industrial distributor of products used by
businesses to maintain, repair, and operate their facilities.
(source: company website)

Why We Like It:
Is the U.S. economy headed for a double-dip recession?  That
depends on who you ask.  Both the bulls and bears have plenty of
credible arguments to support their market bias.  The most recent
economic data, however, hasn't given the bovines much to cheer
about.  On Thursday morning the government reported that non-farm
productivity fell by 0.2% in the fourth-quarter, to its lowest
level since early 2001.  Analysts were expecting a gain of half a
percentage point.  While it's hard to read too much into one
number, that certainly isn't a positive sign for the
manufacturing sector and the economy as a whole.  Throw the
never-ending war concerns into the equation, and it's easy to see
why the Dow Jones slipped to a new multi-month low on Thursday.
This is a technically significant breakdown because the index
does not have any noteworthy support until the October lows near
7250.  The psychologically important 7500 level presents a more
realistic short-term bearish objective.

Shares of Grainger, which have direct exposure to the
manufacturing group, have been declining with the Industrials.
The stock underperformed the major indexes today and came within
just five cents of violating the relative low of $45.60.  And
much like the Dow, GWW is trading well above its next level of
clear support.  We're looking for shares to retrace the steep
mid-October gains and move towards $40.00.  A possible fly in the
ointment is the $44.00 level, which acted as resistance in
September.  This area is also just above bullish support on the
point-and-figure chart.  We believe that shares will fall below
$44.00 if the Dow continues towards 7500.  On another technical
note, bears can be pleased with the reversal in the daily
stochastics (5,3,3).  This reversal stemmed from GWW's recent
rollover near $48.00.  In order to confirm downside momentum
we'll use an entry trigger at $45.59.  Our stop-loss will be
placed at $48.06, slightly above the relative highs.  Those
looking for less upside risk could use a stop slightly above
yesterday's high of $47.25.

BUY PUT FEB-50 GWW-NJ OI=83  at $4.30 SL=2.15
BUY PUT MAR-50*GWW-OJ OI=N/A at $4.70 SL=2.35

Average Daily Volume 351 K


---

AZO – AutoZone, Inc. $64.00 -1.59 (-1.71 last week)

Company Summary:
AutoZone is a retailer of automotive parts and accessories,
primarily focusing on do-it-yourself customers.  Each of its
more than 2900 stores in 42 states and Mexico carries an
extensive product line for cars, vans and light trucks,
including new and re-manufactured automotive hard parts,
maintenance items and accessories.  Approximately half of its
domestic stores also have a commercial sales program, which
provides commercial credit and prompt delivery of parts and
other products to local repair garages, dealers and service
stations.

Why We Like It:
There's a certain magic about unfilled gaps.  They tend to get
filled in, especially when filling the gap will take a stock in
the direction of the primary trend, both of the stock and the
overall market.  Shares of AZO were a consistently successful
bearish trade throughout the month of January.  Right up to the
final week, that is.  The stock bottomed at $58 (after a $15
slide) and actually recovered a bit before a huge upward gap on
January 30th, following the company's raised guidance and a
Lehman upgrade.  Zoom!  the stock gapped up to $64.10 (remember
that number) soared to $67.50 in the opening minutes and began a
process of sideways consolidation that appears to have just about
run its course.  You see, the stock has been failing to move
higher, and has actually set a series of lower highs in the past
week.  Monday's action topped at $67, Tuesday's at $66.75,
Wednesday's at $66.30 and then things fell apart today, with the
stock falling to close down at $64...exactly.  That's right, AZO
has now edged down into that gap and we're looking to play the
high-odds fill of that gap, and possibly retest the late January
lows.  You see, even with the strong upward move, the stock
couldn't generate a PnF Buy signal, leaving the current bearish
price target of $44 in play.  A trade at $63 will create a fresh
PnF Sell signal and get us that much closer to being back in its
well-established bearish trend.  Our initial target will be the
$61 level (filling the gap) with our secondary target a test of
the $58 late-January low.  Momentum traders can use a drop under
$64 ($63.75, just to be safe) to enter the play, while those
looking for a bargain will want to look for another failed rally
in the $65-66 area to allow them to get on board.  We are
initially setting our stop rather wide ($67.10) as that is just
above Monday's intraday high.

BUY PUT FEB-65 AZO-NM OI=1320 at $2.45 SL=1.25
BUY PUT MAR-65*AZO-OM OJ=1586 at $4.00 SL=2.50

Average Daily Volume = 1.47 mln



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The Option Investor Newsletter                 Thursday 02-06-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: PUT - AZO
Traders Corner: If You Make A Mess, Let’s Hope You’re Paper
Trained
Futures Corner: Bias via Bullish Percent
Options 101: Gold

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

AZO – AutoZone, Inc. $64.00 -1.59 (-1.71 last week)

Company Summary:
AutoZone is a retailer of automotive parts and accessories,
primarily focusing on do-it-yourself customers.  Each of its
more than 2900 stores in 42 states and Mexico carries an
extensive product line for cars, vans and light trucks,
including new and re-manufactured automotive hard parts,
maintenance items and accessories.  Approximately half of its
domestic stores also have a commercial sales program, which
provides commercial credit and prompt delivery of parts and
other products to local repair garages, dealers and service
stations.

Why We Like It:
There's a certain magic about unfilled gaps.  They tend to get
filled in, especially when filling the gap will take a stock in
the direction of the primary trend, both of the stock and the
overall market.  Shares of AZO were a consistently successful
bearish trade throughout the month of January.  Right up to the
final week, that is.  The stock bottomed at $58 (after a $15
slide) and actually recovered a bit before a huge upward gap on
January 30th, following the company's raised guidance and a
Lehman upgrade.  Zoom!  the stock gapped up to $64.10 (remember
that number) soared to $67.50 in the opening minutes and began a
process of sideways consolidation that appears to have just about
run its course.  You see, the stock has been failing to move
higher, and has actually set a series of lower highs in the past
week.  Monday's action topped at $67, Tuesday's at $66.75,
Wednesday's at $66.30 and then things fell apart today, with the
stock falling to close down at $64...exactly.  That's right, AZO
has now edged down into that gap and we're looking to play the
high-odds fill of that gap, and possibly retest the late January
lows.  You see, even with the strong upward move, the stock
couldn't generate a PnF Buy signal, leaving the current bearish
price target of $44 in play.  A trade at $63 will create a fresh
PnF Sell signal and get us that much closer to being back in its
well-established bearish trend.  Our initial target will be the
$61 level (filling the gap) with our secondary target a test of
the $58 late-January low.  Momentum traders can use a drop under
$64 ($63.75, just to be safe) to enter the play, while those
looking for a bargain will want to look for another failed rally
in the $65-66 area to allow them to get on board.  We are
initially setting our stop rather wide ($67.10) as that is just
above Monday's intraday high.

BUY PUT FEB-65 AZO-NM OI=1320 at $2.45 SL=1.25
BUY PUT MAR-65*AZO-OM OJ=1586 at $4.00 SL=2.50

Average Daily Volume = 1.47 mln



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

If You Make A Mess, Let’s Hope You’re Paper Trained
By Mike Parnos, Investing With Attitude

“The time to correct a mistake is before it is made. The causes
of mistakes are, first, I didn’t know’; second, I didn’t
think.’”  Words of wisdom by Henry Buckley.

That’s what we try to do at the Couch Potato Trading Institute –
prevent mistakes through education.  Can we learn from other
people’s mistakes?  Or, do we have to personally experience a
disaster before we realize the error of our ways?

A little learnin’ goes a long long way.  Many CPTI students are
paper-trading. The smartest thing you can do is paper trade.  The
dumbest thing you can do is think you know what you’re doing
after a few successful paper trades.  Take your time.  Take your
studying seriously, and then, take your profits.

Learn your strategies, do your research, put on a few trades and
send me your questions as they arise.  Try to save you money by
learning your lessons before you open your wallet.
______________________________________________________________

Mike,
Recently, with the SPX at 857.53 I thought, "Resistance is
holding, the recent H&S pattern is obviously bearish, and all my
main indicators say we're going to fall."  A couple of months
ago, I would have just bought an out of the money put (probably
on the OEX).

Because I expected a strong directional move over the next few
weeks, I paper traded an OTM put debit spread. I went out until
March because I wanted to make certain that I had enough time for
this move. There was not much difference in IV on the options I
was looking at.

Buy March 850 put @ $34.00 (Ask) & Sell March 840 put @ $28.60
(Bid) for a net debit of $5.40.  I know that I could have gotten
between the bid and ask on both options if I were trading this
for real.

I thought about going further out of the money, but I felt that I
was pushing it to hope for too big of a directional move.

I checked the market again about an hour and a half later.  The
SPX was at 842.86.  I was right, and a 15-point move had occurred
in my direction intraday.  But I checked option prices and found
that I was $2.90 negative if I wanted to exit right now.

I was right immediately, and I am behind in the trade anyway.  I
still think the market has further to fall, and I believe my
paper trade will be profitable, but I still think I'm doing
something wrong.  How should I approach a trade where I expect
strong directional move that might be too fast for a calendar
spread?

Response:
Be grateful this is a paper trade.  You've put yourself into a
position where your chances of success suck (less than optimal).

#1 -- You're picking a direction.  You have only ONE WAY to make
money.  If you had chosen an in-the-money debit spread, at least
the SPX wouldn't have to make a big move just to get profitable.

#2 -- You picked an out-of-the-money debit spread with a one-
month expiration.  If you had chosen an in-the-money debit
spread, the SPX would have a fighting chance of being
profitable.  With an OTM spread, the SPX has to make a big move
just to get into profitable territory -- and it has to do it in
about a single option cycle.  That's asking an awful lot.

#3 -- You picked a debit spread.  Why?  Let's say you guessed
right and SPX fell to the desired level.  It will still cost you
two additional commissions (exercises) to cash out of your spread
and collect your profits.  You can likely establish a position
(bear call spread) with a credit that approximates the profit you
would make if the SPX made the same move.  The only difference is
that, on settlement, the call options would expire worthless and
just disappear.

With a spread, keep in mind that your profit is based on the long
option gaining in value faster than the short option is losing in
value.  If you’re looking for a relatively quick move, and hope
to take quick profits, a spread is not the best choice.

#4 -- You picked an underlying that has a 1-2 point bid/ask
spread.  That means that if you're going to put on a debit
spread, you should do so with the intention of holding it for the
duration of the trade.  If you plan to exit the trade early,
you'll end up at the mercy of the market-makers.  Only the
exercising of both options at the end of the option cycle will
make these ridiculous bid/ask spreads go away.

#5 -- You are right in that you can trade within the bid/ask
spreads since the SPX trades only on the CBOE.  How much can you
save?  Don't get greedy.  The market-makers are smarter than we
are.  They may have a lot of stress, but they also have a lot of
money -- and that doesn't come from being stupid.

#6 – If you’re confident enough in your analysis that the market
is going to tumble, here’s a safer way to play it – using your
example, but with more recent numbers and using the QQQs (at this
writing trading at $24.09).
a) Sell a bear call spread – Sell the March 25 call and buy the
March 28 call and take in $.70; then
b) Buy the March QQQ 23 put for $1.00.  Use the $.70 to defray
the cost of the $23 put and you’ve spent only $.30 – and you’re
in position to profit handsomely if the market tumbles down.  If
the QQQs fall to $20, you can cash in and take your profits (over
$2.80) on the long $23 put.  You can liquidate the bear call
spread if you like, or just let it expire worthless in March.

If you’re wrong about this whole mess, the worst-case scenario is
that you lose $3.00 (from the bear call spread) plus the other
$.30 it cost you for the $23 put.
_____________________________________________________________

Mike,
I'm a big fan of your trading methods. The more I read your
articles the more I see the truth in your credo. The ability to
limit risk and garner a recurring income is the foundation for a
long-term trading account.

Regarding the Iron condor spreads, what is your thought process
to identify potential candidates? For instance, what attracted
you to MMM as opposed to some other security or index?

Response:
I don't have any particular scanning software to find stocks
and/or indexes.  I stumbled across MMM a long time ago while
pulling up charts on high price stocks.  Higher price stocks
usually have higher premiums, so I've always found that's a good
place to start looking.

Other OI writers, particularly Ray Cummins, have scanning
software to help come up with candidates.  His articles are an
excellent starting point.

You'll find, after awhile, that you'll trade the same stocks or
indexes again and again.  Readers ask why I use the QQQs
frequently.  Well, they're somewhat predictable, the $1 strikes
and the friendly low bid/ask spreads. There are precious few
underlying assets that offer those positives.
_____________________________________________________________

CPTI PORTFOLIO POSITION UPDATE
Position #1: BBB Iron Condor – Closed Thursday at $86.70.
An Iron Condor is a credit position consisting of both a bull put
spread and a bear call spread. The objective is for the
underlying, at expiration, to finish anywhere within the $85-$95
range.

Position #2: MMM Iron Condor – Closed Thursday at $123.02.
The support at $120 once again seems strong, as does the
resistance at $130. Enough.  That should give MMM enough room (10
points) to bounce around for the next four weeks.

Position #3: SMH Straddle – Closed Thursday at $20.98.
We bought the SMH May $22.50 puts and calls and spent $5,850 on
10 contracts. But, since we’re going to stay in this position
only for the February option cycle (5 weeks), we’ll only be
risking about $.85 ($850).   We’re looking for a big move for the
semiconductors and we don’t care which way.

Position #4: QQQ ITM Strangle – Closed Thursday at $24.21.
This is a 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.

Position #5A: XAU Condor – Closed Thursday at $75.68.
This is a longer term trade expiring in March.  There is a $20-
point range and we took in a credit of $1.40.  We want XAU to
finish anywhere between $70 and $90.

Position #6A:  MMM Condor – closed Thursday at $123.02.
This is a longer term more conservative trade expiring in March.
There is a $20-point range and we took in a credit of $1.20.  We
want MMM to finish anywhere between $115 and $135.

Position $7A:  QQQ 2-Month Baby ITM Strangle – closed Thursday at
$24.21.
Bought March QQQ $26 puts & Buy March QQQ $24 calls for total
debit of $4.20.  There is $2 of intrinsic value and only $2.20 of
risk.  We’re looking for a 3-4 point move in the QQQs.  After the
move, we want the successful long option to pay for both options.
Then we’re left with a “free” long option and waiting for the
market to reverse.
______________________________________________________________

Question:  	How many market-makers does it take to roof a house?
Answer:	Depends on how thin you slice them.
______________________________________________________________

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

Your questions and comments are always welcome.
Mike Parnos
CPTI Instructor


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

Bias via Bullish Percent
By John Seckinger
jseckinger@OptionInvestor.com

It all comes down to “maintaining favorable field position.”
Looking at bullish percents can be a great way to understand
risk via a quantitative indicator.

The idea of this article came about when I started to wonder if I
should begin wondering about a “bear trap” in the markets.  I
took a bearish position on Thursday as some significant support
areas were broken; however, the close was more neutral than I
would have liked and went home flat (as is usually the case due
to such uncertainty).  Since a trend only takes place when the
'market agrees with everything,’ I wanted to make sure that risk
via bullish percent indicators were letting me know that I was
not crazy in looking for a move lower.

The equity markets in general are stuck in-between a few daily
retracement levels, and things continue to look "great" at the
top and "horrible" at the bottom of this range.  Speaking of
ranges, I still use the ranges found in this article as a way of
assessing least resistance on a price basis.

http://www.OptionInvestor.com/futurescorner/fc_013003_1.asp

However, the "Developing a Bias" article doesn’t tell me if I
should be “quarter position short, half position short, full-
position short, etc.”  The bullish percent charts are used for
that purpose.

As Jeff Bailey explained it to me, "John, think of the NASD and
NYSE Bullish Percent as the Mississippi River, and then the SPX
as the Missouri that feeds into the Mississippi, and the OEX and
NDX as smaller rivers that flow into the Missouri.  Then we have
the Dow, which is like a tiny creek that can have an effect on
some of the smaller rivers."  Perfect analogy.

If these "bull confirmed, bear alert, etc." words are foreign to
you, please read Jeff's article below:

http://www.OptionInvestor.com/baileysbasics/bb_112200_6.asp

Ok, let us take a look at a few of these charts and see if it
helps with our bias (which is bearish as outlined in "Developing
a Bias").  Starting with the most narrow, the Dow, notice how
the bullish percent reversed from above 70 and gave a "Bear
Alert" reading.  This can be used going forward, since whenever
an index is outside the 30/70 area, it is important to realize
that a reversal will give an "alert" for a possible reversal.
This could happen at any moment in the Dow, since it is currently
under the 30 area.  Important Disclaimer:  I used the "non-
traditional" one-box scale to further highlight the noise that
takes place in such a narrow index.  Especially noted should be
the rise before this indicator went into "Bear Confirmed" status
(column of X’s).  When going to stockcharts.com and typing in
"$BPINDU", remember to use a 2.0 box scale.

Chart of $BPINDU

Therefore, when looking at the Dow, this index appears to be
oversold; however, least resistance is still lower.  Now let us
check the OEX to see if the Dow's movement is affecting a more
broad-based indicator.

Looking at a bullish percent chart of the OEX, this index also
showed a 'rally' back into "Bull Confirmed" status (red circle).
Just like the Dow, the column of O's before placed this index in
"Bear Alert" status, but a trader seeing the words "Bull
Confirmed" during the small reversal might have been wondering if
there was a shift in sentiment.  There wasn't, and that is the
purpose of this article.  To simply recognize the hierarchy.
Getting back to the $BPOEX chart, the fall to 50% and taking out
the last column of O’s put the indicator into "Bear Confirmed"
Status and had longs realizing that risk really was in being
long.  Going forward, the first objective is for a move to 30%,
and then we could see a move lower to 18%.  With that said, least
resistance is lower.

Chart of $BPOEX

Now getting to a bullish percent chart of the SPX, we only have
the title "Bull Correction" status to ponder over (note: it would
be "Bear Confirmed" if one a one-box chart) within the $BPSPX;
however, risk is for a move to 30% (still significantly lower)
and then the bottom of the last column of O's at 20%.  Note that
this indicator didn't have a bounce higher like the Dow and OEX,
and this should make it clear that the breath of the market is
more negative than first thought.

Chart of $BPSPX

Finally, it makes sense to look at a chart of the NYSE Bullish
Percent Indicator ($BPNYA), since this is the 'Mississippi River'
in which all aforementioned indicators flow into.  As the chart
shows below, this indicator is in Bull Correction Status and
definitely has some room to fall (30%, and then possibly 26%). In
fact, this indicator could be the sledgehammer’ on the others if
it really starts to fall.

Chart of $BPNYA

In conclusion, all the 'rivers, streams, and creeks' are
signaling risk to the downside.  This keeps our bias as being
bearish in the short and intermediate term.

After a trader looks at the bullish percent charts, THEN it is
time to see if a weekly S1 or S2 level holds, followed by looking
to see if the intermediate term pivots (read monthly) is in fact
acting as strong resistance.  Moreover, is only the daily R1
tested, and not R2?  Or maybe not even the daily pivot is tested.
This will help in recognizing levels to be more aggressive in.
As is the case now, we have to be concerned about a bear trap;
however, we are going to need a serious reversal before we can
begin wondering about the time when it makes sense only to go
long.  It might even be now IF the NYSE bullish percent was
looking horrible; however, that is far from the case..

Ask Away,

John Seckinger


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

Gold
Buzz Lynn
buzz@OptionInvestor.com

Wake me from a dead sleep, and through the grogginess, I'll still
extol the virtues of this timeless metal like a salesman
possessed.  A gold bug, I am not, just as I was not a technology,
micro-cap, or Internet stock freak in the late '90's.  I'm a bull
market freak (when I find them).  And that's what I see in gold.

Throughout history, there have always been central bankers.
Throughout history, there has always been gold.  Throughout
history, they have always done battle. . .with central bankers
winning many battles with fiat currency using the implicit message
of "Trust me".  But gold always wins the war because it is the
only true and trusted currency when fiat currency spins out of
control, as it has done at the hands of the world's central
bankers.

So For me, it's about preserving wealth in a world rife with
central bankers.  But it's also about fundamentals and technicals
- buying low on an emerging bullish trend and selling high when
others see the value - plain old buying low, selling high.  If
that coincides with your investment and/or trading strategy, you
can't afford not absorb the content of today's article.

Let me be clear here.  I am not "recommending" gold as the be-all,
end-all investment for the next 5-20 years.  However, many readers
over the last year have noted my references to building a
financial "ark" in which I hope to preserve as much of my capital
as possible.  Remember, in a bear market, he/she who loses the
least wins.  And like Warren Buffet, I hate losing capital.  So
job one for me is preserving it, over and above making a profit,
though I seek that too.  A big part of my financial ark is gold.

(This isn't new.  You can go to 
http://www.OptionInvestor.com/traderscorner/043002_1.asp for some
additional background.)

Why is that?  Let's review quickly.  In the last four articles,
we've spent time dissecting inflation and deflation, real estate,
and stocks.  Within that context we've discussed high personal
debt burden, China's exportation of deflation, competitive
currency devaluations, exchange rates, the mortgage debt bubble,
consumer spending, the Fed's printing press, and the state of the
U.S. economy, along with the corporate profit picture.

In a nutshell, none of these conditions are particularly conducive
to the appreciation of financial assets.  Tangible assets are what
I would rather own for this period of the economic cycle.  (Check
out my earlier article on that concept here: 
http://www.OptionInvestor.com/traderscorner/tc_050202_1.asp)

Of course, as one of the remaining holdouts who still thinks 2003
will be a down year for equity markets - the 4th in a row,
shattering all statistical dogma that says I will be wrong - you'd
expect that from me, Fundamentals Guy.  Hey, at least I'm
consistent!

The worst possible outcome in owning gold is that we have a
financially indestructible insurance policy that never relies on
the brand name or credit rating of the issuer - a put option
against the financially unthinkable that never expires.  It may
lose immediate value in the world of a successful central banker.
But how long does that last?  We can never truly label them
"successful" because every central bank engaged in making fiat
currency - every one - eventually fails.  In the end, the central
bankers' track record is zero for roughly 400 currencies that have
tried it dating back to the Roman Empire.  Mere coincidence?
Nope.  It is a statistical certainty.  It is only a matter of
when.  Gold will always be there and always have a value (though
it will fluctuate, but hasn't any investment always done that?) no
matter how many economists and bankers tell us it is a relic of
the past.

Does that spell the end of the world?  No way.  Can the Fed and
other currency printers in the modern world pull a rabbit out of
their hat again?  Sure, just like they have for the last 90 years.
But eventually, the world demands real currency, not "print at
will" Monopoly money.  Central banks eventually run out of
gimmicks and manipulative power just as a magician must eventually
run out of rabbits.

People obviously live through monetary upheavals; otherwise we
wouldn't be here now.  Perhaps we are doing so now, as others have
in past centuries.  Since WWI or WWII is a pretty short gauge of
history to be so certain that gold is irrelevant.  So what better
time, as a prudent investor, and a prudent provider for your
family to consider the case for gold now, if for nothing more than
an insurance policy?

Of course, the best outcome is that we become fabulously wealthy
by recognizing and taking advantage of the beginning stages of a
new bull market in gold!  We really only need one chart for this.
Shall we take a peek?





Don't get me wrong.  This chart does not tell us to drop
everything we are doing and run to our nearest gold coin dealer.
I don't suggest that ever.  What I do suggest with the chart above
is that gold has entered a bull market.  We can see that in the
simultaneously rising 200-dma and 50-dma.  We can also see the
breakout from a long period that kept the candlesticks in a
neutral wedge.

But in my opinion, gold is momentarily overextended.  I would not
be surprised to see it fall back to a more supportive level, say
in the $350-$360 range.  Just like in the late '90's, dip buying
works in any bull market.  I'm betting that for traders, it will
work here too.

Aside from this technical aspect, let me pull together the
fundamentals starting with the inflation/deflation argument.  "So
wait a minute, Buzz.  You said that gold could do well in
inflation OR deflation?  How could it be?"

Here's a simple explanation:  Those who believe that Fed-generated
inflation will devalue the Dollar are obvious candidates for gold
purchases.  Each marginal Dollar printed that can't be borrowed,
used, or spent adds to the once-considered-limited supply.  By
definition, if they aren't worth the paper they are printed on,
their value diminishes compared to real money, aka gold.

Just for the record, for every ounce of gold added to the supply
since Alan Greenspan became the Fed Chief, the G-Man has created
$6250 in new paper Dollars.

For those who believe that deflation is the monetary condition of
the next decade, and that excess debt is the Black Plague of a
deflationary economy (it is), gold is still the safest place to be
since deflating Dollars will buy us progressively less gold.
Deflationary Theory buyers are protecting their buying power
against erosion.

The case for buying gold can thus be made by both inflationists
and deflationists.

Either way, here is the case fundamentally spelled out by Richard
Russell of the Dow Theory Letters.  The guy is a Dow Theorist and
grizzled veteran of markets for over the last 50+ years.  A friend
of mine, knowing my interest in gold, sends me these snippets on
occasion, which I'll reprint here with all credit to Mr. Russell.

Russell notes, "Each year there is less production of gold,
meaning the actual supply/demand equation is favorable for gold."

"China and Asia are exporting deflation, while the Fed is fighting
deflation by inflating the US money supply."

One of my favorite outside-the-box thinkers, James Grant (true
research analyst and Forbes columnist) sheds detail: "Each of the
three principal currency blocks - dollar, euro, yen - would
welcome a falling exchange rate...Of course, the top currencies
can't all simultaneously become cheaper against each other.  They
can only become cheaper against an alternative.  Such are the
times that few governments welcome a rising alternative.  What
would that alternative be?  Constant readers may close their eyes,
because they have read the answer here before.  It is gold, an
asset with the virtue of being mute. It never complains and never
explains, and it has no central bank...It does not object if its
price appreciates..."  Amen, I couldn't have said it better.

Russell continues:

"The US trade deficit is going through the roof. This is putting
increasing pressure on the dollar."

Here's another voice from Felix Zulauf, Zulauf Asset Management of
Zug, Switzerland:  "Other central banks will at some point then
try to support the dollar, because if it declines too much, it
hurts their exports. They will be forced to adopt the same policy
as the U.S. central bank, and you will have the whole world
creating more fiat currencies.  That's when gold will really run."

Zulauf goes on:  "How far? In 2000, the ratio of an ounce of gold
compared to the Dow stocks was 45 to 1. It took 45 ounces of gold
to buy the Dow. Now, the ratio is down to 25 to 1."

My comment:  Remember in the late 1970's when gold topped out $878
per share about the time the Dow traded around 850 - a 1:1 ratio.
That isn't a weird occurrence.  We've all lived through that; some
of us, many times.  Probability, given the severity of the bull
market, and the likelihood of an equally severe correction in
equities (Newton's Law) says that it could happen again.  It isn't
as far-fetched as it seems now.  However, I'm not predicting the
Dow Industrial's parity with gold at $2000.  There' a long way to
go before we see that, and maybe it never happens.

Anyway, back to Russell:

"The Bush administration will be generating massive deficits as
far as the eye can see, at least $1trillion over the next five
years."

"The existence of terrorism will mean that the US is on the path
of endless spending for security."

"The dollar is in a bear market that promises to take the dollar
vastly lower over a period, not of months, but of years."

"US citizens, cities, counties, states, and the federal government
are up to their eyeballs in debt. The only financial item around
that has no debt against it is gold, the only real money."

[I feel compelled here to add a comment by Bill Bonner, Publisher
of the Daily Reckoning.  "The whole world is getting worried; it
counts on the American consumer like a liquor store depends on
alcoholics.  There are better customers, maybe, but none more
reliable."  At least that use to be the case until cirrhosis set
in.]

Back to Russell again:

"Third world nations are not honoring their debts, thus faith in
debt and paper money is declining rapidly."

"All the above point to an almost unique situation in favor of
real money -- gold."

I can't add much other than to close with a quote from
Warren Buffett's father. . . yes, his FATHER, a congressman from
Nebraska.  He delivered this line in a speech over 54 years ago in
1948 before Warren even possessed a driver's license.

Buffet Sr. warned, "The paper money disease has been a pleasant
habit thus far and will not be dropped voluntarily, any more than
a dope user will without a struggle give up narcotics...I find no
evidence to support a hope that our fiat paper money venture will
fare better ultimately than such experiments in other lands....

Well said, but we've had to wait 54 years for those words to
possibly ring true, and still, our Fed prevents the failure.  It
will happen, but when is anyone's guess.  Rather than fret the day
in worry with eyes cast low, I simply buy gold and sleep well.

If that is of interest to fellow readers, and enough drop me line
(put the word "gold" in the subject line), I'll be glad to do a
follow-up on the different vehicles in which to make that
investment or trade.

Until next week, keep your hands in your pockets for a better
entry into the yellow metal!

Buzz


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