Option Investor

Daily Newsletter, Monday, 02/10/2003

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The Option Investor Newsletter                   Monday 02-10-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: We Know One Thing
Futures Wrap: Fact versus Fiction
Index Trader Wrap: (See Note)
Weekly Fund Wrap: Equity Funds Fall For Fourth Consecutive Week
Traders Corner: Recent Activity by the Fed
Traders Corner: Anatomy of a Trade

Updated on the site tonight:
Swing Trader Game Plan: Geo-Political Poker

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
02-10-2003                   High    Low     Volume Advance/Decl
DJIA     7920.11 +  55.88  7933.68 7801.29   1452 mln  942/486
NASDAQ   1296.68 +  14.21  1298.57  1275.19  1186 mln  894/266
S&P 100   422.03 +  3.24   422.91  415.49    totals   1836/752
S&P 500   835.97 +  6.28   837.16  823.53
RUS 2000  362.10 +  3.32   362.10  356.91
DJ TRANS 2144.74 +  4.77   2151.52 2111.75
VIX        37.70 -  1.10    40.48   37.53
VIXN       47.31 -  0.95    49.52   47.22
Put/Call Ratio 0.94

We Know One Thing
by Steven Price

One thing was made clear to us today - anything can happen to the
market in a world on the edge of political turmoil.  We began the
day with the continuation of the downward grind we've witnessed
since breaking down below the support level that held us through
the end of January and beginning of February.  We set yet another
relative low and tested the next downside support level, with
little more than a dead cat bounce.  Things were looking ugly for
most of the morning and considering last week's breakdown, the
lack of a more significant bounce just fed the bears.  Then we
got news that Iraq would allow U2 reconnaissance flights.  We got
a big bounce, taking out several intraday levels of resistance.
That reaction simply led us know that we are playing with fire in
any position we initiate.  Does that mean we shouldn't be
trading?  Not necessarily.  It does mean, however, that traders
willing to take on a world of uncertainty should be playing
primarily with risk capital.

While it is likely that Iraq is simply trying to postpone the
inevitable, just four days before the next UN weapons inspectors'
report, it was good enough to bring a knee-jerk reaction from the
markets.  It was likely a quick round of short-covering by
panicky bears, but also could have been bulls playing a longer
delay before bullets fly or the possibility that Iraq is going to
slowly give in. In any case, it was a red flag for both sides.

While the downside levels we tested this morning do not appear to
be strong support from a past snapshot, the fact that we bounced
from them is enough to give them some credibility.  The morning
low on the Dow was 7801, lending credence to the round number
support at 7800.  The SPX bottomed at 823 and the OEX at 415.
The lows in the COMP and NDX were 1275 and 950, serving as
quarter increments that we can now use as focal points.

How do we determine just how much of the action we are seeing is
due to political concerns and how much is simply due to the
strength or weakness of equities?  It is impossible to answer
that question decisively, but we can begin to look at some
signals that tell us where we can expect a change in sentiment if
we will get it at all. While we can blame today's bounce on the
news, it did come at a curious time, with several other
indications that we were reaching support/resistance that could
have signaled a turn.

First, let's take a look at the bond market.  Yields signal the
inverse of bond activity.  As bonds are sold, yields rise, and
can be used to track action in the equities as funds flow between
the two markets. A look at today's action in the ten-year yield
shows that the yield actually began to find support and turn
higher prior to the announcement from Iraq. We approached
Friday's low, but did not break it, even as the major equity
indices were finding new lows.  That was our first signal that
the drop had slowed on its own and the flow of money from
equities into treasuries was drying up. At that point bears could
have begun to protect short positions, even without having any
idea what was about to hit the newswires.

Chart of the 10-year Yield

Chart of the Dow

The other indicator that began to signal oversold conditions and
was bumping up against both horizontal resistance, as well as a
descending trend line, was the Market Volatility Index (VIX).
The VIX measures option premium levels in the OEX and can bee
seen as an indicator of downside fear, along with the put/call
ratio. As the markets fall, the VIX generally increases, as
traders become wearier of selling options and covered stock
writers sell stock and buy in short options.  It generally
reaches support and resistance levels at similar times as the
equity markets, although in an inverse manner. This morning, as
the Dow was testing support at 7800, the VIX was once again
testing resistance at 40%.  I say once again, because that 40%
level has acted as resistance for the last three sessions, as
well as on the January 27 drop.  Bulls will call this a contra-
indicator, telling us when to expect a bounce.  However, while we
have bounced intraday in conjunction with tests of that
resistance level, we have also continued the slow downward slide
in the equity markets on subsequent days.  That tells me that it
can be used as an indication of when we may bounce, but tit
doesn't necessarily mean the bounce will hold. That being said,
the 40% level also signaled a longer term rally in the equities
as it fell away from 40, on its way down from the 50s, in late
October.  In fact, that drop from 40% was a good indication that
we'd be headed higher for a while, as the market continued higher
through early December.  We are testing it from the opposite
direction this time, so the circumstances are different, but it
still serves as a pivotal level to keep our eyes on. If we
continue to fail to breakthrough that level, we may be looking at
a bounce in the broader markets.  If we breakthrough decisively,
we may be in for another leg down in the equities and another
trip into the 50% range in the VIX.

Chart of the VIX

A couple of other political indicators also showed a belief that
the move by Iraq may at the very least stave off the formation of
a coalition against it in favor of an invasion.  Gold futures
continued the sharp reversal from last week's highs ahead of
Colin Powell's U.N. presentation.  After reaching a high of
388.9, gold futures have sunk down to a low of 363.7 over the
past three sessions.  Gold is seen as a defensive play that has
closely mirrored the action on the geo-political front and can be
monitored for signals of just how much fear is built into the
stock market as an additional measure of where investors are
putting their money.  The higher the degree of fear of war, the
more money seems to come out of stocks and into gold.

Chart of Gold Futures

The other indicator of war fears is oil.  While the general
strike in Venezuela has also played a part in recent swings, oil
has moved in concert with gold as geo-political events develop.
Oil headed lower today, following the action in the gold market,
after the Iraqi announcement.  It still remains elevated, with
the futures trading over $34 per barrel.  On Friday, we cracked
the $35 per barrel mark and although we have pulled back, the
possibility of war is anything but discounted.  The pullback more
likely forecasts a delay in the war and thus prices remaining
lower for a longer period of time.

Chart of Oil

Today's bounce was nice, but fell short of a reversal on the
point and figure charts that gave us triple (and quad in the case
of the Dow and SPX) bottom sell signals last week. Those sell
signals were confirmed with additional boxes of "O" in the
current column that got us past the technical bear trap.  Of
course, with political event risk, we have to look at technical
indicators with a skewed eye, but they still do a good job of
measuring the strength of investors' reactions to the news.
After all, regardless of the news, we are most concerned with
just how committed traders really are from the bearish or bullish
side and technical indicators give us a great picture of that
commitment. We can come up with any number of scenarios as to
just how the market will react to war.  Many pundits are saying
to go long when the bullets start flying, because that's what you
should have done in 1991.  But if the cost of oil skyrockets,
won't that be a huge negative for the economy in the short term?
What if history does not repeat itself?  Remember, in 1991, the
market traded at much lower values and the tech revolution had
yet to emerge.  We were looking at a much different picture, so
whose to say that we will see history repeat?  If we do achieve
point and figure reversals into columns of "X", remember the last
four have each led to selling opportunities.  Of course, the
reversals down, prior to the triple-bottom sell signals, were
buying opportunities over the last month and that has not been
the case over the past few days. However, that should only serve
to underscore the overall bearishness of the market.

Another bearish sign came out of the tech sector.  The Nasdaq
Composite had been holding steady just above the 1300 support
level up until last Friday.  While the broader indices were
setting new relative lows, it was clinging to support at that
round number.  It had been significant support in the past and
the drop through that level seemed to signal that the last domino
had fallen.  This morning's activity before the announcement
seemed to confirm that theory, as we continued to set new
relative lows.  However, the news led to a rally in almost all
equity sectors, including the techs.  The COMP, however, topped
out at 1298, just below the level that had served as strong
support.  The general rule is that support, once broken, tends to
act as resistance.   That certainly appears to be the case here.
If bears can take anything from the rally, it seems to be that
they can now rely on that resistance slowing any intermediate

So what can we take from today's action that will help us
tomorrow or the next day?  First of all, we saw that sentiment
was still down to open the session.  Second, we saw the power of
political developments on the market, with a sudden 100-point
swing to the upside in the Dow as soon as the news hit the wires
that Iraq would be allowing U2 fly-overs.  However, before we saw
those developments, we saw signals from the VIX and the bond
market that a turnaround may be in the cards ahead of time.  We
also saw confirmation of the politically motivated rally from the
oil and gold markets.  Essentially, on a day when we saw few
technical indicators change by much, we got snapshots from a
number of different areas that traders can use to predict future
movement and rely on for explanations of why they saw what they


Fact versus Fiction
By John Seckinger

All three futures contracts might 'feel' as though a bid is going
to materialize in the near term; however, price action still
tells a much different story.  Will solid resistance areas
actually be tested on Tuesday?

Monday, February 10th at 4:15 P.M.

Contract       Last    Net Change    High        Low       Volume

Dow Jones     7920.11    +55.88    7933.68     7801.29
YM03H         7909.00    +56.00    7915.00     7780.00     31,976
Nasdaq-100     969.96    +12.91     974.48      950.81
NQ03H          969.00     +9.50     976.00      951.00    240,369
S&P 500        835.97     +6.28     837.16      823.53
ES03H          836.00     +5.50     836.75      822.25    651,025

Contract         S2         S1       Pivot        R1         R2

Dow Jones      7752.64    7836.38   7885.03    7968.77    8017.42
YM03H          7733.00    7821.00   7868.00    7956.00    8003.00
Nasdaq-100      941.41     955.68    965.08     979.35     988.75
NQ03H           940.25     954.50    965.25     979.75     990.25
S&P 500         818.59     827.28    832.22     840.91     845.85
ES03H           817.25     826.50    831.75     841.00     846.25

Weekly Levels

Contract         S2         S1        Pivot        R1         R2

YM03H         7608.00    7730.00    7932.00    8054.00    8256.00
NQ03H          921.50     940.50     970.50     989.50    1019.50
ES03H          801.25     815.75     840.00     854.50     878.75

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

Contract        S2         S1        Pivot       R1         R2

YM03H         7237.00    7642.00    8253.00    8658.00    9269.00
NQ03H          875.75     930.25    1019.25    1073.75    1162.75
ES03H          775.00     814.75     876.00     915.75     977.00

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

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

Short 827.25, exit 824.50, change +2.75
Short 832.00, exit 833.75, change -1.75
Short 833.00, exit 835.25, change -2.25
Short 829.25, exit 832.00, change -2.75

Total for the session: -4.00
Total for the week: -4.00
Total for four weeks and Monday: +37.25

For information on the Futures Monitor and Jim Brown's posts,
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


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

The ES contract traded down to the 822.25 level on Monday,
testing the half-way mark between a couple of important daily
retracement areas (see chart below).  Then, following the news
that Iraq will "unconditionally" accept U-2 over flights, prices
took out the daily pivot of 835 and traded pretty lackluster
until the close.  Note that not one of the "strong areas" listed
on Sunday were tested, especially 839 and the intermediate pivot
level.  Above 839, look for resistance from 844.50 to 846.50.
Then comes strong resistance:  850 to 852.75.  With Monday's
close above Tuesday's pivot of 831.75, we might actually have our
short-covering rally on Tuesday.  Note that the MACD is oversold
and looks like it will cross higher, while the recent
consolidation in the daily stochastics portend the possibility of
a bounce as well.  Until 839 is cleared, bears will continue to
be firmly in control.

Chart of ES03H, Daily

A 30-minute chart of the ES contract shows prices just above the
mid-point of a bearish regression channel, and it does look like
we will have our test of 839.  I left in the daily retracement
levels of 835 and 828 because they MIGHT become significant on
Tuesday.  If the daily pivot of 831.75 is taken out to the
downside, then a trader could look for resistance at 835 instead
of waiting for 839 if a bounce does take place.  Support can then
be found at 828, used primarily if volume is light and it doesn't
seem as if 821 will be reached.  Note:  Daily S1 comes in at

Chart of ES03H, 30-minute

Bullish Percent of SPX: 41.80% and even on the day. The
column of O's is still at 11.  I still expect a move in the
bullish percent to the 30% level.  This indicator is currently in
"Bull Correction" status.  Looking at P&F analysis, the SPX
contract is underneath its quadruple bottom at 845 and
added to its column of “O’s” with a trade under 825.  The column
is currently seven deep, and there is a chance we get a three-box
reversal as shorts cover.  The bearish price objective remains at
750.  Support is seen from 805 to 810.

The March E-mini Nasdaq 100 Contract (NQ03H)

The NQ contract is still underneath both its 50% daily
retracement area (983) and the top of a daily bearish regression
channel.  Notice how half the distance from two daily retracement
levels (1024.50 to 983, or 1003) lines up with the mid-point of
the daily Bollinger Bands.  Therefore, look for even stronger
resistance there.  Until we get a daily close above 986.50
(revised higher as seen in the second chart), the objective is
still 941.50 before I will look for a significant bounce.  MACD
does 'look' like it will cross higher, but, as traders, it makes
sense to follow price action and not trade on what might happen.

Chart of NQ03H, Daily

Looking at a 90-minute chart of the NQ contract, the "resistance
zone" has been widened from 979.75 (daily R1) to 986.50, and this
area should hold solid intermediate implications.  Once above
986.50, I will not expect weakness until after the daily R1 level
is cleared to the downside.  If this area does become support,
bulls can look for a move towards 1019, re-evaluating positions
if 1003 is tested.  On the other hand, if the daily pivot at
965.50 fails, expect a fall to the 940-942 area.  Taking out the
daily pivot at 965.25 should tell bulls once again not to trade
on hope and go with least resistance, which is still lower.

Chart of NQ03H, 90-minute

Bullish Percent for NDX:  This indicator remained unchanged at
39%, but continues to portend bears will be selling rallies
going forward.  The column of "O's" remains at 13.  This
indicator is in "Bear Confirmed Status".   Note: The NDX,
according to P&F charts, has a bearish price objective of 825 and
just missed adding another "O" on Monday by 0.81-points.
The low was 950.81.  If 950 is reached before a column of
X's is seen, the bearish price objective will fall to 775.
Resistance is seen at 1000.

The March Mini-sized Dow Contract (YM03H)

The YM contract took out Friday's low of 7809, but then trapped
bears as the Iraqi news hit the wire soon thereafter.  The weekly
pivot of 7932 was NOT tested; therefore, there weren't any real
technical developments to mention during the rise higher.  Going
forward, I will look for resistance from 7932 to 7938, and a move
above 7938 should propel the contract above 8000.  If 8015 is
cleared, look for some solid short covering.  A daily close above
8015 should change sentiment to more neutral levels, and would
indicate that a test of 8145 will take place in the near term.  A
failure at 8015 will have shorts adding to positions, since this
area is really the 'proverbial line in the sand'.  If the YM
contract falls under 7868 and the daily pivot, traders should
look for a fall to 7742.  Much stronger support is below from
7608 to 7634.

Chart of YM03H, 60-minute

Bullish Percent of Dow Jones: A P&F chart missed adding another
“O” on Monday by 1.29-points (low of 7801.29); therefore, the
bearish price objective of 7500 remains.  Support is still seen
at 7800.  As far as the bullish percent is concerned, it remained
unchanged at 20 percent.  The column of O's is still at 20.
Note: The last column of O's ended at 10%.  The next column of
X's will put this indicator in "Bull Alert" status.

Good Luck.

Questions are welcomed,

John Seckinger


Check the Site Later Tonight For Jeff’s Index Trader Article

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Equity Funds Fall For Fourth Consecutive Week

Uninspiring economic news, disappointing corporate outlooks, the
space shuttle tragedy and concern about war with Iraq all helped
to produce further losses on Wall Street, with equity funds down
for the fourth consecutive week.  The S&P 500 index of large-cap
stocks fell by three percent, with mid- and small-cap stocks off
by more than three percent.  Small-cap growth funds were hardest
hit, declining by four percent on average over the week.  Equity
income and large-cap core funds held up a little better than the
average diversified fund, losing less than three percent for the
week, using Lipper fund indices as of Friday, February 7, 2003.

Balanced funds, international and emerging market funds, as well
as gold funds lost less than two percent for the week.  Balanced
funds benefitted from the income and stability provided by their
fixed income and cash allocations.  Japanese stocks rallied last
week, boosting the weekly returns of non-U.S. stock funds, while
gold prices fell slightly following Colin Powell's speech to the
United Nations (buy the rumor, sell the fact).  Gold is behaving
like it did before the Persian Gulf war, when gold future prices
crossed above $400/ounce.  Experts expect gold funds to continue
to receive safe-haven flows as long as tension with Iraq is high.

Fixed income funds posted positive total returns during the week
with the exception of high-yield bond funds, which were flat for
the week.  The U.S. investment-grade bond market, as measured by
the LB Aggregate Bond index, rose by 0.4 percent during the week,
with intermediate- and long-term bonds returning 0.6% to 0.8% on
average, respectively.  Short-term bonds were up 0.3% on average,
slightly below the total bond market index.  Global/international
funds were the best weekly performers, returning over 0.5 percent
on average using Lipper's numbers.  International bond funds have
returned 2.6 percent on average since December 31.

U.S. Equity Fund Group

 Week   YTD
-3.0%  -5.5%  Vanguard 500 Index Fund (VFINX)
-3.1%  -6.0%  Vanguard MidCap Index Fund (VIMSX)
-3.6%  -6.3%  Vanguard SmallCap Index Fund (NAESX)
-3.1%  -5.5%  Vanguard Total Stock Market Index Fund (VTSMX)
-2.9%  -5.5%  Lipper Large-Cap Core Equity Fund Average
-3.1%  -5.0%  Lipper Mid-Cap Core Equity Fund Average
-3.4%  -6.2%  Lipper Small-Cap Core Equity Fund Average
-3.0%  -4.7%  Lipper Multi-Cap Core Equity Fund Average
-3.4%  -4.0%  Lipper Science & Technology Fund Average

You can see that equity funds lost three percent or more for the
week, with a number of Lipper categories now down more than five
percent since December 31.  The only equity funds to gain ground
last week were natural resources funds, which benefitted from an
increase in oil and gas prices, and funds that short stocks such
as the Rydex Ursa Fund (RYURX).  The Rydex Ursa Fund generated a
positive weekly return of 3.2 percent.

The average equity income fund lost 2.8 percent last week, aided
slightly by its dividend income.  Stock funds with growth styles
generally sustained bigger weekly losses than value-driven funds.
The average mid-cap growth fund fell by 3.4 percent according to
Lipper, while the average small-cap growth fund lost 4.0 percent.
Small-growth funds are now down 6.5 percent on average on a year
to date basis through Friday, February 7, 2003.

Fidelity Magellan (FMAGX), the nation's largest actively-managed
equity fund fell by 3.1 percent last week, comparable to the 3.0
percent weekly decline for the S&P 500 (Vanguard 500 Index Fund).

International Equity Fund Group

 Week   YTD
-1.3%  -5.4%  Vanguard Developed Markets Index Fund (VDMIX)
-2.2%  -2.1%  Vanguard Emerging Markets Index Fund (VEIEX)
-1.3%  -5.1%  Vanguard Total International Stock Index (VGTSX)
-1.8%  -5.4%  Lipper International Fund Average
-1.5%  -2.1%  Lipper Emerging Markets Fund Average
-1.1%  -0.1%  Lipper Gold Fund Average

For the 5-day period, the MSCI EAFE developed markets stock index
lost 1.3 percent, with Europe down 2.1 percent and Pacific stocks
up 0.9 percent, carried higher by a stock rally in Japan.  As you
can see, the average international fund lost 1.3 percent over the
week, matching the weekly loss for the Vanguard Developed Markets
Index Fund (MSCI EAFE).  Some funds within the group fell by less
than one percent for the week.

Gold mutual funds fell by 1.1 percent on average with gold prices
sliding following Powell's presentation of evidence (re: Iraq) to
the U.N. Security Council last week.  A fast resolution to war is
what Wall Street is hoping for, but a slow resolution is expected
to continue to keep investors on the sidelines and leaning toward
gold as a safe haven.

U.S. Fixed Income Fund Group

 Week   YTD
+0.3%  +0.3%  Vanguard Short-Term Bond Index Fund (VBISX)
+0.6%  +0.1%  Vanguard Intermediate-Term Bond Index Fund (VBIIX)
+0.8%  +0.6%  Vanguard Long-Term Bond Index Fund (VBLTX)
+0.4%  +0.4%  Vanguard Total Bond Market Index Fund (VBMFX)
+0.2%  +0.4%  Lipper Short Investment-Grade Fund Average
+0.4%  +0.7%  Lipper Intermediate Investment-Grade Fund Average
+0.4%  +0.6%  Lipper Corporate A-Rated Debt Fund Average
-0.0%  +2.2%  Lipper High Current Yield Fund Average
+0.3%  +0.2%  Lipper U.S. Government Fund Average

High-yield funds struggled last week, along with equities, as the
threat of war with Iraq overshadowed some new issues in the yield
market.  Investment-grade bond funds reacted positively to weaker
than expected corporate earnings outlooks and economic reports to
produce weekly gains.  According to Lipper, the average corporate
A-rated debt fund returned 0.4 percent for the 5-day period, with
the average U.S. government fund rising by 0.3 percent.

Domestic fixed income fund returns generally increased the longer
the fund's average duration and maturity was.  Vanguard Long-Term
Corporate Bond Fund (VWETX), for example, rose by 1.0 percent for
the week, while Alliance North American Government Income Trust A
(ANAGX) was 1.1 percent higher.  Real return, inflation-protected
bond funds earned strong weekly returns too.  Vanguard Inflation-
Protected Securities Fund and the PIMCo Real Return Fund returned
1.2 percent and 1.1 percent, respectively, over the 5-day period.

International Fixed Income Fund Group

 Week   YTD
+0.6%  +1.9%  Lipper Global Income Fund Average
+0.6%  +2.6%  Lipper International Income Fund Average

In addition to long-term and real-return bond funds, global and
international bond funds produced solid results again last week.
The American Funds: Capital World Bond Fund rose by 0.65 percent
last week, commensurate with its global/international peer group.
PIMCo Foreign Bond Fund was close behind, returning 0.64 percent,
while SEI International Fixed Income Fund picked up 0.61 percent.

Those were some of the better performers last week among non-U.S.
income funds with $500+ million in assets.  International income
funds are now up 2.6 percent on average since December 31, 2002.

Balanced Fund Group

 Week   YTD
-1.6%  -3.1%  Vanguard Balanced Index Fund (VBALX)
-1.8%  -3.3%  Lipper Balanced Fund Average

With bond prices rising last week, balanced fund losses were much
lower than their pure-equity fund peers.  Within the group, funds
with higher fixed income stakes did better than those with higher
equity allocations.  For example, Vanguard’s Wellington Fund (64%
stocks) fell by 1.7 percent last week compared with a 0.4 percent
decline for sibling, Vanguard Wellesley Income Fund (36% stocks).

The $19.5 billion Income Fund of America A (AMECX) from American
Funds lost 0.9 percent last week.  Investors benefitted from the
fund’s below average equity stake (45% of assets) and its higher
than average cash stake (17% of assets).  So, most funds in this
group did their job of diversifying portfolio risk by allocating
assets to different asset classes.

Money Market Fund Group

1.13%  Vanguard Prime Money Market Fund (VMMXX)
0.81%  iMoneyNet.com All Taxable Money Market Fund Average

With Federal Reserve policy on hold, expect money market yields
to remain near recent lows.  The average taxable money fund now
has a 7-day (simple) yield of 0.81 percent, per iMoneyNet.com’s
weekly MMF survey.  The low-cost leader in the group, Vanguard
Prime Money Market Fund sports one of the better current yields
as well.  Only a handful of prime retail funds currently have a
higher yield than Vanguard’s 1.13 percent.

PayPal Money Market Fund (402-935-7733) remains in the top spot
among prime-retail money market funds with a 7-day simple yield
of 1.38 percent.  Touchstone MMF (800-543-8721) is next with an
average 7-day simple yield of 1.22 percent.

Mutual Fund News

The Associated Press reported last week that mutual fund controls
may be tightened under new rules proposed by the SEC, which would
possibly result in the creation of a "self-policing" organization
in the mutual fund industry (to ensure compliance with securities
laws).  Shareholder advocates think tighter compliance rules have
long been overdue, while those against the new rules claim mutual
funds already have the systems, policies, and procedures in place
to ensure SEC compliance.

The Investment Company Institute (ICI) is not a governing body in
the sense of the proposed new rules, but it does represent a body
of leading mutual fund families that are organized to promote the
best interest of the mutual fund industry and shareholders.  They
have long stood for promoting fair standards and practices within
the industry and in my opinion have done an excellent job serving
shareholders’ best interests through the years.  The ICI web site
is located at www.ici.org if you wish to find out more about them
and what they stand for.

In Morningstar news, Fidelity Investments said it has laid off 25
support staff and 25 contract workers.  According to Morningstar,
Fidelity laid off nearly 1,700 employees last year - representing
more than 5% of its total staff.  Fidelity also made more manager
changes in its lineup of sector funds.  Driehaus Funds and Nuveen
Funds, both Chicago-based companies, announced management changes
also.  See Morningstar’s Fund Times report at www.morningstar.com
for more information, or contact the fund families directly.

Turner Midcap Value (CCEVX) will change its name and strategy, to
Turner Core Value Fund, effective April 15th.  The new core value
strategy will allow it to invest not only in mid-cap value stocks
but also in small- and large-cap value stocks.  So, in this case,
the capital sector allocation will be core (multi-cap) with stock
selection performed using a value style.  A nice compliment might
be the Turner Core Fixed Income Fund (TCFIX) a Morningstar 4-star
rated bond fund.  Turner’s Large Cap Value Fund also has a 4-star
overall rating for risk-adjusted performance relative to category
peers, so there’s reason to be optimistic here.

That’s it for this week’s fund wrap.  Have a great week.

Steve Wagner
Editor, Mutual Investor


Recent Activity by the Fed
By: Jonathan Levinson

Every morning a small but growing number of traders monitors the
Federal Reserve Bank of New York's website for its daily open
market operations announcement.  We've been watching and
reporting on these open market ops daily since last summer, and
it's become commonplace to see the cryptic "ON/RP" heading, which
is the fed's abbreviation for "Overnight Repurchase Agreement",
or "repo" as it's come to be known.  There are also multi-day
repos, but whatever their duration, repos have been the order of
the day since I've been following it.

For a detailed explanation of the mechanism of the fed's open
market ops, see my article of October 27th, 2002 at
http://www.OptionInvestor.com/traderscorner/tc_102702_3.asp.   In
brief, a repo is an agreement by which the fed extends money,
usually a few billion dollars' worth, to its network of 22
primary dealers, who then hit the market and invest it.  On the
stated maturity date, those funds must be returned, and so the 22
primary dealers must exit their positions and return the funds to
the fed.  The reverse is a matched sale purchase agreement in
which money is drawn from the dealers to the fed, who then
returns it to them on the maturity date.

Since October 2002, we've been seeing the amount of fed money in
the markets steadily increase until, unsurprisingly, mid-January,
which coincides with the relative peak in equity prices.  The
simple view of the fed's open market operations was that more
money in repos means more liquidity for the markets, which
translates into higher equity prices.  It was for this reason
that I began following the daily announcements closely.  Indeed,
fed chairman Greenspan has been draining liquidity since the
January peak, and equity prices have followed.  Last week we saw
a reverse repo, which is actually a temporary removal of funds
from the market.  This replaces the old matched sale purchase
agreement (MSP) which requires the return of the drained funds to
the 22 primary dealers by the fed.  It’s been months since I last
saw a reverse repo or MSP.  The market sank all through the day.

However, to reduce the fed's open market operations to an iffy
relationship with equity prices severely understates the true
importance of the fed's open market operations, and the depth of
Greenspan’s concerns.  As we have seen, there are much larger
financial currents with which central banks have to contend, and
given the relative size of financial markets, equities are mere

To start at the top, the US Dollar Index is down over 20% since
January 2002.  As I have noted in the Market Monitor, there are
profound repercussions associated with a falling USDX.  Foreign
investors in some cases need a 20% appreciation in their US
investments just to break even on the currency conversion.  That
translates into a "SELL" for US denominated assets, and generally
those assets are the most accessible, widely-held, recognizable
investments, such as GE, MSFT, other such blue chips and, of
course, US treasury bonds.

It's at this point that Greenspan’s plight becomes apparent.
While it's no problem for him to reach for the batphone, fire up
the cropdusters and dump a few billion dollars into the bucket
shops to be thrown at a few select equities and ramp the indices
to the moon, the currency markets are not so compliant.  More
than one trillion dollars' worth of currencies are traded daily,
and it's tough to move those markets for any length of time with
cash alone.  Thus, we see the endless (almost laughable by now)
statements from central banks-  Japan's are my favorite- of how
the central authority will  aggressively devalue the yen" or
aggressively buy US Dollars.  Traders jump on these statements, a
short term move is accomplished, and the statements seem to get
forgotten.  Oh, to have access to the batphone for a few

Nevertheless, only the smallest of dents in even the intermediate
trend can be made with such antics, and for the fed, the problem
remains.  If foreigners are getting tanked by holding US Dollars,
they will sell their US investments.  This is but one of the many
reasons why US equities have been swan diving since mid-2000.
Treasury paper, however, has been a touchier subject.   In case
some of you weren't sure, Governor Bernanke and Greenspan himself
removed any doubt when they stated that the fed was watching and
would continue to watch the thirty year yield closely, and would
aggressively prevent the yield from breaking out.

Why is that?  It's a topic for another article, but the
credit/refi/mortgage bubble is one which won't deflate as
elegantly as the equity bubble has so far.  Unlike stocks which
can be dumped for a loss or held or simply ignored as they
depreciate, those troublesome statements dumped in a pile of
negative feng shui by their addressees, a rise in interest rates
will cause serious credit dislocations, and could potentially
cause social dislocations.  With interest rates at multidecade
lows and consumers at all-time record levels of debt, a cascade
could be caused by a sudden uptick in interest rates as fixed by
treasury yields.  A pile personal account statements disappears
from view more easily than a notice of mortgage default, for

And so, as foreigners, who account for an estimated 30+ percent
of the US bond market, continue their exodus from US assets, it's
their sales of bonds that are the most likely cause of concern to
the fed.  I believe that the bear market in equities has helped
to offset this yield-uptick because many investors have been
fleeing equities for the relative safety of US bonds.  But as the
bear market matures, the volumes will presumably lighten up until
we approach a real low, which I do not believe we have yet seen
in equities.  This too will be a discussion for another day, but
in any event, I believe that most of the fed's open market
operations have been destined for bonds, and these interventions,
which is what they are, will be most likely to increase.  A quick
glance at treasury yields confirms the effectiveness of Mr.
Greenspan’s stabilization efforts.

Reflecting on this last chart for a moment, it’s interesting to
note that October 2002 kicked off the fall rally.  While yields
initially rose as one would expect with a sudden move to
equities, they were dramatically sold as we see from the bearish
engulfing candles toward the end of October and in December.
Equities did not correct to nearly the degree that the thirty
year yield did, and this looks very much like the fed’s
footprints to me.

If I'm correct, what can we expect next?  The Federal Reserve
will continue to buy treasury paper from foreigners exiting their
positions.  I don't expect to see the fed spend more than it
needs to maintain yields at their current levels.  A significant
drop in yields would bring about its own problems, because low
yields mean yet lower demand for US Dollars with which to
purchase bonds.  High yields are necessary to bring about an
increase in demand for US Dollars, but will also threaten the
health of our debtor consumers, corporations, and the credit
bubble in general.  I expect Mr. Greenspan to attempt to keep
yields right where they are until the economy can pick up,
unemployment can decrease, companies can become more profitable-
until productivity can increase.  Until that time, the fed
appears to be in a tight box, and it is within this context that
I understand fed's daily open market operations and the various
installments of fed-speak to which we are privy.  For these same
reasons and in the current climate, I do not believe that equity
prices are or will be of much consequence to the fed.


Anatomy of a Trade
by Mark Phillips

Thinking back to my early days as a fledgling trader, I remember
that one of the hardest things to learn was how and when to enter
and exit a trade.  Picking winning trades carries its own
challenges, but that can be done effectively while the market is
closed and I have time to think.  But actually implementing the
trade during live market conditions is where the rubber meets the

I lost count of the number of times in those early days where I
would have given my eye teeth to sit on an experienced trader's
shoulder and see how they would have executed the trade I was in
or had just completed, because I was sure it could have been
done better.  Such is the type of second-guessing that I think
is common to most new traders.

In the past, I've written about the merits of getting familiar
with a handful of stocks and trading only those stocks in order
to take advantage of the understanding that builds when you
follow those stocks on a regular basis.  Today, we have a
fortuitous combination, as one of those stocks that I've been
following for several months happens to be both on the OI Put
list, as well as one of the stocks I'm currently trading.  So
I thought it would be useful if I dissected some charts,
pointing out what I have believed were solid entry and exit
points and why.  Sound interesting?  Great!  Let's go!

Let's start out with the longer-term picture to set the stage
for my overall bearish bias on the stock.

AZO Daily Chart - The Big Picture

Starting with the breakdown out of the descending channel
(which immediately followed some negative comments in the
company's earnings report), it has been all downhill for the
stock for the past 2 months.  The first big slide south ended
when AZO found support (of sorts) at the ascending trendline
that began back in early 2001.  That was good for a minor
rebound, as the bulls desperately tried to defend the stock
along that trendline for 3 weeks.  But once a channel is broken,
it can present formidable resistance, as AZO investors found
out in early January.

AZO Daily Chart #2

The stock managed to push up to the $73 level on January 2nd,
where it met stiff resistance at both the lower channel line
(blue) and the top of the December 13th gap.  At the same time,
daily Stochastics were just starting to roll over (just below
overbought) and this was a high odds buy-and-hold put entry.
Confirmation wasn't too long in coming either, as the stock
plunged through that ascending trendline for the last time,
losing more than $15 by the time it finally bottomed near $58.
During that long slide, each rally attempt was simply another
solid put entry point.

AZO Daily Chart #3

Midway through the January plunge, we see the bottom of the
December selloff (near $66.50) come into play as resistance
before price kissed off one more time enroute to the bottom of
the move at $58.  Notice, that at no point during this process
do I consider buying a breakdown.  Not that there is anything
wrong with it, but the problem I have with it is risk
management.  A rollover from the $66.50 resistance level makes
risk management easy, with a stop placed at $67.  However, if
we waited for the breakdown under $63.50 (1/22) before entering
the trade, where do we place the stop?  That's right, we still
end up placing it initially at $67.  I don't know about you,
but I much prefer taking $0.50-1.00 of risk over $3.50 risk.
That is the primary reason, why I prefer to sell into strength
when trading to the downside.

Up to this point, we've had two hugely profitable trading
opportunities in the past couple months.  The first was in
mid-December, which led to a quick $13 drop.  And then the
month of January yielded a $15 drop.  In both instances, entry
risk was very easy to quantify -- First a rollover from the $80
level (stop=82) and then a rollover from $73 (stop=74).  Once
in the play, it's all about ratcheting the stop down to preserve
gains, while attempting to leave enough room for the play to
continue to run.

By late January, I was starting to get nervous about keeping
positions open and was expecting something to pop, but was
figuring that this trend had pretty much run its course for
the time being.  Translation: I wanted to be out of bearish
positions by this time.  Imagine my surprise and joy when the
stock popped up to the $67.50 level on January 30th, following
the company's increased Q2 earnings guidance.  Then it was all
about looking for some sort of resistance pattern to form, so
I could define a new entry strategy.

AZO - 60 minute chart

That didn't take long, as the following day, the stock made
another assault on resistance, failing at a lower level and
then trading down for the remainder of the day.  Connecting
the highs of those two days gave me a trendline that -Lo and
Behold! - defined the intraday highs on the following two days.
I've labeled a couple of entry points on the chart above.  The
first was aggressive, as the trendline hadn't been formed yet,
but the second one was more conservative, as Stochastics were
rolling over, while price failed at the descending trendline
(magenta) for the fourth time in 5 days.  Things started to
really get interesting from there, as the slope of the descent
increased, as the stock really fell apart late last week,
allowing a steeper trendline (red) to be constructed.  Trades
taken up in the $65-66 area could now have their stops trailed
to just above the red trendline, guaranteeing that we couldn't
lose, so long as we didn't get a huge gap up on news.  In the
current market environment, that seems unlikely, don't you think?

Monday's action was a perfect opportunity to harvest gains on
the play, or at the very least tighten up those stops.  The
intraday low of $61.75 was only $0.55 above the bottom of the
gap, and to me that was a no-brainer of an indication to
harvest some gains and then look for an oversold bounce to
re-enter the play.  We got a rebound in the afternoon session,
but it wasn't very convincing to me.  Take note of that red
descending trendline, which now rests at $63.40.  I'll be
watching that line tomorrow for a rollover, and would consider
that a solid entry back into the play.  What would make me even
happier though is a sharp gap open that fails up at that magenta
trendline, just above $65.  If that opening strength failed just
as quickly, (as I suspect it would), then it would make for an
even better entry point, with risk easy to manage with a tight
stop.  Take note of the fact that we've lowered the stop on the
play to $65.50 -- we didn't arrive at that level by accident.

There's one more piece of this puzzle that is absolutely critical
to understand if you want to grasp why I have only focused on
the downside in AZO these past few months.  Looking at the PnF
chart, you can see that there has only been one weak PnF Buy
signal since the beginning of December (labeled as Bull Trap),
as it was only good for one box above the prior column of X
before a sharp and strong reversal there at the $73 level.
Using the PnF chart is just another way of seeing that the
stock is under heavy distribution, and there has been very
light buying interest.

AZO - Point and Figure Chart

The clincher to keep me excited about the trade was the new
PnF Sell signal (red O's) that was generated on Monday.  Since
it exceeded the prior column of O's by 2 boxes, we can be
reasonably certain that it isn't a bear trap.  And since we
haven't had a Buy signal since the January slide, that bearish
price target of $44 is still in play.  And here's a fun
exercise -- look at each of the highlighted SELL signals on
the PnF chart and compare them to what was happening on the
candle chart.  Isn't that a nice correlation?  Those PnF
breakdowns are the only times I would have considered entering
on a break of support, because of the important information
yielded by the PnF chart with respect to supply and demand.

I haven't taken every entry in this stock that I talked about
here today, but I have taken some of them.  The point is that
this is only one stock.  I follow it closely.  So many new
traders waste a lot of time jumping from one stock to another,
to another, without ever really becoming familiar with any of
them.  AZO is not unique.  It just happens to provide a great
subject for highlighting the merits of both working with a
small group of stocks that you know very well and learning
what it means to take a good entry or a good exit from a play.
Ask yourself how many stocks like AZO you would need to be
trading on a regular basis to meet your goals as defined by
your Business Plan, and I think you'll see why I believe this
topic is so important.

I hope you found this useful.  Questions are always welcome!


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Geo-Political Poker

That geo-political risk I've been highlighting the past couple of
weeks stuck its head out today, taking away some nice profits
early this morning.

To read the rest of the Swing Trader Game Plan Click here:

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

“7 Steps to Success – Trading Options Online”.

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and clicking on the link to the book on its home page.



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Contact Support
The Option Investor Newsletter                   Monday 02-10-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

Stop Loss Updates: AT, AZO, GWW, TSCO
Dropped Calls: None
Dropped Puts: PNRA
Play of the Day: Put - AZO

Updated on the site tonight:
Market Posture: Which Way Is For Real
Market Watch: Still Looking Down

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Stop Losses based on the option price or the stock price.
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Anything else is too slow!



AT - put
Adjust from $47.25 down to $46.50

AZO - put
Adjust from $67.10 down to $65.50

GWW - put
Adjust from $48.06 down to $46.50

TSCO - put
Adjust from $36.55 down to $35.25




PNRA $27.10 -0.36 (-0.36) Playing out nearly perfectly in terms
of the game plan we laid out a couple weeks ago, PNRA continued
its descent this morning, trading a low of $26.52 before lifting
with the rest of the market.  Our strategy in the weekend update
was to use a decline to the $26.50 area as an opportunity to
harvest gains and exit the play.  While the morning slide fell
a couple pennies shy of achieving that goal, we're not going to
quibble.  We're dropping PNRA tonight as a successful play that
reached our desired target.  It's time to move on to the next
winning play.

If you trade options online, then you need an online broker that:
offers true direct access to each option exchange
offers stop and stop loss online option orders
offers contingent option orders based on the price of the option or
offers online spread order entry for net debit or credit
offers fast option executions

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call 1-888-889-9178 or click for more information.



AZO – AutoZone, Inc. $62.99 -1.16 (-1.16 this 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

Why We Like It:
Much like the rest of the market, AZO spent Friday providing
mixed signals, as it vacillated about the critical $64 support
level.  That level was staunchly defended early in the day
before finally giving way, but just fractionally.  There were
several rebound attempts throughout the day, but each one was
met with a fresh round of selling at a lower intraday high.  All
except for the last one, which appears to have been end-of-week
short-covering, bringing the stock up to close fractionally
above that $64 level.  In the end, it was much ado about nothing,
with the only decent entry point all day being the failed rally
near $65 in the opening 20 minutes of the day.  After that, it
was a slow grind lower.  Even after trading below our $63.75
trigger in the late afternoon, the buyers stubbornly battled
back to close the day with a fractional gain.  One interesting
point is that the final surge higher came to rest just pennies
below the descending trendline that has capped each rally attempt
since the intraday highs on Wednesday.  While not a stellar move
on Friday, the intraday dip below $64 looks to be setting the
stage for a continuation of the pattern of lower highs and lower
lows.  A rollover on Monday should provide additional entry
points as AZO breaks below Friday's intraday low ($63.50),
preferably on continued broad market weakness.  Should we be so
fortunate as to get a rebound first, another failed rally near
$65 (or even as high as $66) would make for an even better entry
point.  For now, keep stops set at $67.10.

Why This is our Play of the Day

Confirming last Friday's breakdown, AZO made one final attempt to
hold the top of the late-January gap at $64 this morning, before
the sellers made their intentions clear.  The stock quickly slid
through $63, then $62 before reaching its low of the day at
$61.75.  With the broad market recovery, AZO began its slow and
methodical rebound that took it right back to the $63 level,
where it consolidated for most of the afternoon.  Now that the
stock has clearly fallen into its gap, it seems almost certain
that it will completely fill that gap down to $61.20 before
being able to sustain any rebound.  New entries look particularly
favorable on another rollover near the $63.40 level, as this is
just below Friday's intraday low and is also the site of the
descending trendline that has capped every intraday rally attempt
since the stock topped out near $66.30 last Wednesday.  Should a
serious short-covering rebound take place, the $65 level should
provide formidable resistance now, and a rollover up there would
make for a good aggressive entry point into the play, as that
prior support level was turned to resistance last Friday.  With
today's breakdown, it seems safe to lower stops to just above
that level, so our official stop is now resting at $65.50.  For
a further dissection of this play, be sure to check out tonight's
Trader's Corner article.

BUY PUT FEB-65 AZO-NM OI=1377 at $2.70 SL=1.25
BUY PUT MAR-65*AZO-OM OJ=1586 at $4.50 SL=2.75

Average Daily Volume = 1.47 mil

”If you haven’t traded options online – you haven’t really traded
options,” claims author Larry Spears in his new compact guide book:

“7 Steps to Success – Trading Options Online”.

Order today and save 25% (only $15) by clicking on PreferredTrade
and clicking on the link to the book on its home page.



Which Way Is For Real

To Read The Rest of The OptionInvestor.com Market Watch Click Here


Still Looking Down

To Read The Rest of The OptionInvestor.com Market Watch Click Here


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