Option Investor

Daily Newsletter, Monday, 02/24/2003

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The Option Investor Newsletter                   Monday 02-24-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: U.S. Hits the Accelerator
Futures Wrap: (See Note)
Index Trader Wrap: Let Down
Weekly Fund Wrap: Tech-Led Advance Lifts Equity Funds
Traders Corner: Transport Trouble

Updated on the site tonight:
Swing Trader Game Plan: Back At You

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
02-24-2003                   High    Low     Volume Advance/Decl
DJIA     7858.24 -  159.87  8017.34  7851.11  1455 mln  274/1175
NASDAQ   1322.38 -  26.64  1343.09  1321.44   1197 mln  286/877
S&P 100   421.47 -  8.40    429.87  421.17    totals    560/2052
S&P 500   832.58 -  15.59   848.17  832.16
RUS 2000  358.22 -  6.14    364.36  357.90
DJ TRANS 2017.69 -  78.72   2095.82 2013.01
VIX        36.77 +  2.63    36.78   35.43
VIXN       44.88 -  1.22    46.84   44.58
Put/Call Ratio 0.85

U.S. Hits the Accelerator
by Steven Price

It is getting more and more difficult to decide just how much 
world events are weighing on the markets and just how much 
economics are figuring in.  Friday's wild intraday swings were no 
doubt due to international developments. However, today's drop 
may have been either a look back at Thursday's poor economic 
numbers or a result of the U.S. apparently setting a timetable on 

Colin Powell said in a speech in Japan on Sunday that the U.S. 
wants a U.N. Security Council vote after Weapons Inspection Chief 
Hans Blix gives his report on March 7.  On Friday, Blix asked 
Iraq to destroy Al-Samoud 2 missiles by March 1.  The order was 
the result of the missile's range exceeding limits set by the 
U.N. in 1991 and 1994 and Iraq said it was studying the order. 
Blix also said in a Time Magazine interview that the country had 
yet to account for its stocks of VX nerve agent and Anthrax.  The 
U.S. and Britain introduced a new U.N. resolution on Iraq that is 
believed to declare the country in "material breach" of 
resolution 1441 and basically says Iraq blew their last chance. 
It does not go so far as to authorize military force, but appears 
to set the tone for such action if/when the U.S. and Britain 
decide to move in. The resolution is a risky proposition, since 
there is anything but a consensus on the use of force at this 
time, but if nothing else the U.S. can say it tried to get a 
coalition before making its own decision.  France, Germany and 
Russia are submitting their own resolution which will likely call 
for more inspections. Conspiracy theorists will suggest the U.S. 
would not be introducing the resolution unless it was fairly sure 
it would eventually get a favorable vote.  Right now, it only has 
4 of 13 votes and it will take some pressure to swing the 
pendulum. It needs 9 votes and no vetoes for it to pass, however, 
the latest resolution may simply be an attempt at window dressing 
a decision that has already been made. CNBC reported today that 
Dan Rather had held an exclusive radio interview with Saddam 
Hussein, in which Hussein said he would not destroy the missiles, 
as Blix has requested and he challenged President Bush to a radio 
debate.  While the White House has already responded that the 
issue with Iraq is about weapons, not debates, I suppose it is 
possible Hussein is laying the groundwork for a U.S. presidential 
run in 2004, since it is unlikely he will still be running Iraq 
at that time (GRIN).

Chart of the Dow


Turkey is also a step closer to allowing the U.S. to launch 
strikes against Iraq from within the country.  I suggested last 
week that once it came down to a matter of dollars, at some point 
it would be worked out.  Turkey's stated concerns about the 
economic impact of war in the region were really just a 
bargaining chip, but a hollow one since the country would likely 
suffer those effects whether the U.S. launches attacks from its 
turf or elsewhere.  The Turkish cabinet has already approved the 
latest U.S. aid package and a Parliament vote could come 

All of the war talk is not doing much for the aerospace/defense 
sectors.  The Defense Index (DFI.X) continues to set new 52-week 
lows and is just about the ugliest sector chart I've seen 
recently. Whether this is due to predictions of a short war not 
having much impact on these stocks bottom line, or whether it is 
a reflection that they were overbought on war jitters to begin 
with, they look anything but bullish.  It is hard to imagine 
anything creating a rally at this point, if they haven't moved 
higher as we head closer to a deadline for an invasion.  The DFI 
is now down 20% since January 6 and looks like it has fallen off 
a succession of cliffs. 

Chart of the DFI


The chip stocks actually showed some decent relative strength 
today.  It is hard to say what is holding up the sector, but with 
a poor book-to-bill already released and a severe warning from 
AMAT already figured in, apparently the picture wasn't as bad as 
many institutions were expecting.  This morning Cisco announced 
that its new Compatible Extensions wireless chip technology will 
be adopted by chipmakers Intel, Texas Instruments and Intersil.  
CSCO is offering free licenses to include the technology on chips 
and IBM and Hewlett Packard have already agreed to support the 
technology.  This seems to be the lone impetus for the bullish 
hold in the sector, but the more important part of today's action 
is possibly that it has held onto last week's gains, while the 
rest of the market has been bouncing around the last few days. It 
did eventually succumb to market wide weakness, but spent much of 
the day in the green, before losing less than a point on the day. 
This strength should be a red flag for bears, as the tech indices 
will likely hold some of the recent gains as long as the chip 
stocks do.  If it does begin to roll over, however, with 
resistance just above at the 300 level, we may be seeing a short 
entry point.  No sign of weakness yet, however.  We did see one 
vote of non-confidence from J.P. Morgan, which downgraded 
equipment maker Cymer, saying it saw diminishing prospects for 
lithography demand acceleration in the second half of 2003.  
Morgan said the next two to three quarters exhibit above average 
risk for the company.

Those traders following the point and figure charts can note a 
development that doesn't show up on today's charts.  On Friday, 
the SPX, which had been on a strong reversal higher in a column 
of "X," rolled over back down into a sell signal.  The rollover, 
however, came on the drop that followed the terrorism scare after 
the explosion on Staten Island.  As soon as that scare was over 
and it became evident that it was an accident, we quickly 
reversed direction and headed higher.  That reversal called into 
question the bearish reversal signal we saw, as charts are 
incapable of taking into account world events.  This morning, 
however, we got some confirmation of that reversal.  While we 
failed to trade as low as we did on Friday in the SPX, we still 
traded down below that reversal at 835, confirming the bearish 

Point and Figure Chart of the SPX


The Dow reversed lower on the PnF chart last Thursday when it 
traded down to 7900. The big intraday rally on Friday actually 
failed to reverse that signal back up into a column of "X" and 
today's move back below 7900 also seems to confirm that 
bearishness from these levels. The Dow did set another intraday 
lower low, ticking a few points below Friday morning's low, but 
bouncing again off 7850 (low of 7851). The OEX also reversed its 
bullish column of "X" back into a bearish column of "O" after 
topping out at 430 on Friday and breaking below the 422.50 level 
today. We have been watching this index on a 2.5-point box, which 
more closely mirrors the activity in the Dow and SPX. 

Those Dow theorists watching the transports for confirmation of 
the moves we are seeing in the broader markets will not that the 
TRAN has not only fallen below its February low, but it now also 
testing its October lows. Dow Theory holds that any move in the 
Dow must be confirmed by a move in the transports (although it 
actually started years ago with the Rails Index), before 
determining a true trend. Higher fuel costs continue to weigh on 
the transports and led to a downgrade of several trucking stocks. 
Bear Stearns lowered its ratings on trucking stocks CVTI, HTLD, 
JBHT, KNGT, SWFT and WERN, saying that the group underperformed 
at the beginning of the last Gulf War, when oil prices jumped 
from $23 to $41 per barrel.  

We are seeing the affect of higher fuel prices across the board, 
not just on the transports.  We have heard from numerous 
companies that they have had to adjust their earnings 
expectations due to these costs and both the consumer and 
producer price indexes released last week showed fuel prices as 
the highest contributor to inflation.   Natural gas prices 
continue to surge, jumping an amazing 21% in a single day today; 
heating oil hit an all-time high today; and crude oil futures 
were on the rise once again, adding almost $1 per barrel on the 
April contract to close at $36.52 per barrel. 

Chart of the TRAN


Traders will also note the Market Volatility Index (VIX), which 
bounced back above the 35% level that had served as support in 
the recent past and had indicated market pullbacks.  We closed 
below that level on Friday, and it appears it was not as reliable 
as it had been recently.  However, it did bounce above the last 
false breakdown signal (contrarian to stocks), which came on 
February 3 and also was followed by a drop in equities. The next 
resistance level and the one that has signaled intraday and daily 
equity bounces is 40% and with the VIX sitting at 36.77, it 
appears that we have room to fall before this indicator signals 
support for the OEX.  In contrast, however, the VXN, which 
measures implied volatility levels of the NDX, actually fell in 
spite of the drop in stocks and failed to confirm the move higher 
in the VIX. 

The retail sector got some mixed news today, as Lowe's (LOW) not 
only beat earnings expectations, but raised its full-year 
guidance. The company said the raised guidance was due to its 
plans to expand into New York and other large cities, many of 
which are currently dominated by Home Depot (HD).  On the 
negative side, Federated and J.C. Penney both warned on February 
same store sales results.  The companies both blamed bad weather 
on the east coast for keeping shoppers at home.  Federated said 
its sales would drop 7-8%, approximately double previous 
estimates.  JCP had said its sales would be flat, but now says 
they will be down 2-3%.  Wal-Mart didn't suffer quite as badly, 
but said its sales would track at the low end of the previous 2-
4% guidance. The RLX reversed Friday's gains, finishing down 2% 
on the day.  With most retail earnings reports just behind us, we 
will be judging the market based on these weekly and monthly 
sales results and so far they are not promising.  While so far 
they have been blamed on the weather, which is a valid excuse due 
to much of the terrible east coast snowstorm, it will be 
interesting if those sales make up for the loss on the positive 
side, or if these are simply lost profits.  Given the current 
state of the economy, based on last week's jobs data, I actually 
believe the increase in job losses may be partly responsible for 
the drop in sales, as well as the weather,  and the losses will 
be at least partly unrecoverable. 

Used car prices have now dropped to a five-year low.  This is 
mostly due to a combination of the economy and the deals that 
have been offered on new cars.  While those new cars have been 
flying off the lots, the pressure on used car prices affects 
dealers and manufacturers bottom lines on more than one front.  
First and most obvious is the margins on the used car lots, which 
often outstrip the profits on new cars.  But maybe more 
significantly, the residual values that are figured into the 
price of a lease are affected.  Dealers figure lease payments 
partially by what they can sell a car for when the lease is done 
and if that value drops after the lease is written, it cuts into 
the expected profits. 

One of the catalysts for sending most of the techs lower (with 
the aforementioned exception of the SOX), was a comment from 
Thomas Weisel regarding Oracle's earnings projections. Oracle CFO 
Jeff Henley said he expected the February quarter to show 
slightly positive revenue, although he qualified the projection, 
saying they'd have to wait and see.  This morning, Weisel said 
its channel checks suggested the February quarter still hinges on 
the final two weeks of the month and expressed caution in the 

Today it once again looked like the bounce we saw last week was 
just a temporary reprieve on the way down.  However, it seems 
that each wrap I write carries a different tone than the day 
before.  The news that the U.S. was pressing the accelerator no 
doubt had some affect on the market.  If we get news that there 
will be resistance to the U.S. resolution and more favorable 
treatment for that of Russia, France and Germany, we may see 
another move higher tomorrow - the theory being that there will 
be another delay in U.S. action. There is also the thought that 
multilateral action is better for the markets than unilateral 
action, as it may prevent foreigners from pulling money out of 
U.S. assets.  It is still very tough to predict the next day's 
move.  The PnF reversals back down indicate the next move is 
lower, but I am still not willing to bet the house on it.  Stick 
to risk capital only and make sure your stops are set in 
accordance with a risk profile that makes you comfortable.  After 
all, being able to sleep at night will always hold its value.


Check the Site Later Tonight For John's Futures Market Article


Let Down
Jonathan Levinson

After a weekend of angst, anxiety, sound and fury from nervous 
bears, the markets gapped lower this morning and spent the rest of 
the day looking back.  Last week’s trading action was obviously 
influenced by options expiration week, as price was driven 
inexorably toward option expiry targets like the Millennium Falcon 
in Darth Vader’s tractor beam.  Nevertheless, the action seen 
during that week had conditioned bulls and bears alike to expect 
more of the same-  the sudden rapid-fire bursts of buying to 
erase hours of declines in under twenty trading minutes, the end-
of-day tape painting and short covering, the "light" upward bias, 
and the intimidatingly high put to call ratios.

Most bulls and bears alike were looking for a launch higher today, 
and the opening put to call reading at .47 confirmed it.  The 
ratio climbed from there, but never showed anything approaching a 
bearish bias, spending most of the day in the low .60s. Naturally, 
the market, whose only job is to humiliate the greatest number of 
participants at any moment, gapped lower and churned its way to 
the bottom of last week’s trading range for the remainder of the 
day.  Traders attempted to front run the end of day bounce, but 
their hopes were dashed as it was announced that Saddam Hussein 
was refusing to destroy his missiles and challenged the President 
to a debate.

The US Dollar Index fell, spending most of the day below 100.00, 
as the CRB set a new 52 week high led by natural gas futures which 
closed the day on a 38% gain.  Heating oil futures set a record 
high, surging 4% to a print of 1.15/gallon, the highest price 
since the contract commenced trading on the NYMEX in 1978.

Volume on the indices was light, with the COMPX trading 1.23B 
shares and the NYSE 1.5B shares.  While the endless debate about 
the interpretation of volume patterns rages, it remains obvious 
that low volume declines are a very effective way of destroying 
well without freeing up any liquidity.  Bear markets tend to 
"recruit" volume on the way down, with the larger volume 
explosions usually reserved for the bottom of a decline.

The equities markets broke ranks for a change, with the COMPX, led 
by the NDX and the SOX in particular, outperforming the S&P and 
the INDU by a surprising margin as will be seen in the charts 
below.  The strength in the SOX was reflected in a very low, 
almost bullish TRINQ reading throughout the day, while the broad 
selling in the COMPX was reflected in a low, occasionally deep 
negative TICK.NQ reading.

The INDU printed a bearish engulfing candle today, closing down 
160 points at 7858.  The move caused the stochastics and moving 
average convergence-divergence (the "MacD") to pause on their runs 
from oversold territory.  Bear in mind that while today's action 
was certainly not bullish, these oscillators did not issue any 
sell signals, and the index is still trading on a buy signal.  Of 
course, these signals always lag, but as technicians we do not 
allow ourselves to anticipate signals.  I use the two simple 
moving averages to generate signals as well, but again, no sell 
signal was given. Support came in at 7851, and 7850 is a key 
support.  Below that level, I see first support at 7750 and next 
support at 7630.

The SPX dropped 15 points to close at 832.58, with an intraday low 
of 832.16.  This too is a critical level, below which I see 
support in the 820 area, followed by 808, and then the airball 
zone to the October lows.  The day printed a bearish engulfing 
here as well, but no sell signals from any of the oscillators I 
track.  I might note that the downslope of the 5 and 13 dma's 
is certainly not pretty for traders in bullish positions, but I'm 
reaching here- there are no sell signals yet and the index remains 
above near support.

The COMPX gave up 26 points to close at 1322, with an intraday low 
of 1321.  Like the other indices, it bounced right at support, in 
this case 1320, with last week's low at 1317.  Below 1317, we have 
support at 1310, 1295, 1280, and 1261 to make it to this month's 
lows, following which we can target 1225, and then the airball 
zone below 1200.  Once again, the oscillators I track are nowhere 
near saying "sell", despite the bearish candle printed today.

QQQ dropped .42 to close at 22.76, .10 above its low of the day.  
Below 24.65, we have support at 24.50, 24.30, 24.00, 23.60, and 
23.32.  QQQ failed to hold above the 200 dma at 25.26, and despite 
the relative strength of the QQQ (down 1.71%) to the other indices 
(INDU –1.99%, SPX –1.84%, COMPX –1.97%), there appears to be 
little for bulls to celebrate today.  All eyes will be on the 
support levels identified above at tomorrow's open.

The SOX was off only 0.30%, which accounted for all of the 
strength in the QQQ relative to the broader COMPX, along with the 
low TRINQ readings and low TICK.NQ as strong buying eased the 
slide in those NDX/QQQ components.

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Tech-Led Advance Lifts Equity Funds

Stocks are lower this morning following last week's market rally, 
which saw the S&P 500 large-cap and S&P 400 mid-cap indices move 
higher by 1.6% and 2.7%, respectively, despite the triple threat 
of war, terrorism and increasing energy prices.  Bargain hunters 
lifted stocks earlier in the week, and then again Friday to post 
net gains for the week, with the tech sector and growth equities 
leading the way.  Bond prices also moved higher, with the Lehman 
Brothers Aggregate Bond index up 0.3% for the 5-day period as of 
Friday, February 21, 2003.  

With the broad U.S. indices higher, a number of U.S. equity fund 
categories posted average weekly returns of more than 2.0%, with 
science and technology funds averaging over 3.0%, using Lipper's 
numbers.  Growth-oriented funds outperformed those with core and 
value styles by a wide margin.  According to Lipper, the average 
multi-cap growth fund returned 2.8% last week compared to weekly 
average returns of 1.8% and 1.5%, respectively, for core (blend) 
funds and value funds.  Mid-cap funds outpaced other cap sectors.

The developed foreign markets of Europe and Asia/Pacific posted 
gains too, with the MSCI EAFE index up 0.9% for the week in U.S. 
dollar terms.  Emerging markets, which represent only a portion 
of the total international stock market capitalization, rose by 
2.9% last week.  The average international stock fund increased 
in value by 0.6%, lagging the EAFE benchmark.  Emerging-markets 
stock funds rose by 2.0%, which was good but less than the MSCI 
emerging market index benchmark's 2.9% weekly return.

Bond yields declined as bond prices rose last week, pushing the 
yield of the 10-year Treasury note down 7 basis points to 3.89%, 
per Vanguard's weekly economic report.  The Conference Board's 
index of leading economic indicators fell by 0.1% in January to 
end a 3-month string of gains.  Further, the U.S. trade deficit 
set another monthly record in December - reaching $44.2 billion.  
For the week, the total investment-grade market, as measured by 
the LB Aggregate Bond index, rose by 0.3%, with long-term bonds 
leading the way, up 0.7%.   

U.S. Equity Fund Group

 Week   YTD
+1.6%  -3.4%  Vanguard 500 Index Fund (VFINX) 
+2.7%  -4.7%  Vanguard MidCap Index Fund (VIMSX)
+1.6%  -4.7%  Vanguard SmallCap Index Fund (NAESX)
+1.8%  -3.5%  Vanguard Total Stock Market Index Fund (VTSMX)
+1.8%  -3.3%  Lipper Large-Cap Core Equity Fund Average 
+2.5%  -3.5%  Lipper Mid-Cap Core Equity Fund Average 
+1.7%  -5.1%  Lipper Small-Cap Core Equity Fund Average
+1.8%  -2.8%  Lipper Multi-Cap Core Equity Fund Average
+3.3%  +1.2%  Lipper Science & Technology Fund Average

Among equity funds with over $500 million in assets, the Fidelity 
Select Electronics Fund (FSELX) was once again the week's highest 
performer, returning 5.1% for the week, following a 5.5% increase 
the prior week.  Bargain hunters also lifted communication stocks 
as evidenced by the 4.5% return for Seligman's Communications and 
Information Fund (SLMDX).  Tech funds gained 3.3% on average last 
week, per Lipper.    

Diversified U.S. stock funds with heavy exposure to these sectors 
were among the week's top performers.  RS Diversified Growth Fund 
(RSDGX) picked up 4.2% for the week, for example, while the Janus 
Venture Fund (JAVTX) produced a 3.8% weekly total return.  All of 
the "growth" categories had average weekly returns of more than 2 
percent, according to Lipper, led by mid-cap growth funds (+2.6%) 
and multi-cap growth funds (+2.8%).      

International Equity Fund Group

 Week   YTD
+0.9%  -3.8%  Vanguard Developed Markets Index Fund (VDMIX)
+2.9%  -1.7%  Vanguard Emerging Markets Index Fund (VEIEX)
+1.2%  -3.6%  Vanguard Total International Stock Index (VGTSX)
+0.6%  -4.4%  Lipper International Fund Average
+2.0%  -1.4%  Lipper Emerging Markets Fund Average
+0.3%  -3.1%  Lipper Gold Fund Average

You can see that, according to Lipper, the average international 
fund returned just 0.6% last week, lagging the EAFE benchmark as 
well as comparable U.S. equity funds.  The week's top performers 
came from the emerging markets fund group, which climbed 2.9% on 
average during the week.  Vanguard, Morgan Stanley, and Grantham 
Mayo Otterloo (GMO) were some of the popular fund families doing 
well in this area last week.  

Among diversified international stock funds, strong returns were 
produced by the Putnam Global Equity Trust (PEQUX), up 1.8%, and 
Oppenheimer Global Fund (OPPAX), up 1.7%.  Janus Overseas (JAOSX) 
had a 1.6% weekly return as global technology stocks led the way.      

U.S. Fixed Income Fund Group

 Week   YTD
+0.2%  +0.6%  Vanguard Short-Term Bond Index Fund (VBISX)
+0.5%  +0.7%  Vanguard Intermediate-Term Bond Index Fund (VBIIX)
+0.7%  +0.7%  Vanguard Long-Term Bond Index Fund (VBLTX)
+0.3%  +0.6%  Vanguard Total Bond Market Index Fund (VBMFX) 
+0.1%  +0.5%  Lipper Short Investment-Grade Fund Average
+0.4%  +1.0%  Lipper Intermediate Investment-Grade Fund Average
+0.4%  +0.9%  Lipper Corporate A-Rated Debt Fund Average
+0.9%  +2.7%  Lipper High-Yield Fund Average
+0.3%  +0.4%  Lipper U.S. Government Fund Average

With equities higher, high-yield bond funds posted strong returns 
on the week to lead the fixed income group.  According to Lipper, 
the average high-yield fund increased in value by 0.9%, with some 
funds in the category rising by as much as 2 percent.  Fidelity's 
Capital & Income Fund (FAGIX), for example, had a 5-day return of 
2.02%.  Its Fidelity Advisor sibling returned 1.9% for investors.

With the high-yield sector leading the way, corporate bond funds 
with above-average allocations to lower quality, higher yielding 
bonds generally outperformed those without.  Among US government 
funds, the week's highest returns came from inflation-protected 
securities (real return) funds and long-term funds.  For example, 
the Vanguard Inflation-Protected Securities Fund (VIPSX) and the 
Vanguard Long-Term Treasury Fund (VUSUX) returned 0.7% last week.   

International Fixed Income Fund Group

Week   YTD
+0.5%  +2.3%  Lipper Global Income Fund Average
+0.4%  +3.0%  Lipper International Income Fund Average

As you can see, global and international bond funds also did well 
last week, generating weekly average returns of a half percentage 
point, using Lipper's numbers.  Just as emerging-markets equities 
were strong, so were emerging-markets debt securities.  The Class 
III shares of the GMO Emerging Country Debt Fund (GMCDX) produced 
a weekly total return of 1.4%, for example.  Its sibling, the GMO 
Emerging Country Debt Fund IV (GMDFX), produced a 1.3% return for 

Balanced Fund Group

 Week   YTD
+1.2%  -1.7%  Vanguard Balanced Index Fund (VBALX)
+1.2%  -2.0%  Lipper Balanced Fund Average

Balanced funds produced positive total returns last week both the 
equity and fixed income markets both higher.  Generally speaking, 
the more exposure a balanced fund had to stocks, especially tech 
stocks, the better it performed relative to other balanced funds.   
A mixed equity fund such as Oakmark Equity & Income Fund (OAKBX), 
whose investments include beaten-up growth and technology stocks, 
was the week's top performer among balanced funds (with assets of 
$500 million or more).  It returned 2.4% for the week.

Other popular balanced funds doing relatively well last week were 
AXP Diversified Equity Income Fund (INDZX), up 2.2%, and Fidelity 
Equity Income II Fund (FEQTX), up 2.0% over the week.  Fidelity's 
Balanced Fund (FBALX) and Equity Income Fund (FEQIX) rose by 1.8% 
and 1.7%, respectively. 

Money Market Fund Group

1.10%  Vanguard Prime Money Market Fund (VMMXX)
0.78%  iMoneyNet.com All Taxable Money Market Fund Average

According to iMoneyNet.com, the average taxable MMF yield (7-day 
simple) remained at 0.78% for a second straight week, as was the 
case for Vanguard's Prime Money Market Fund, which held at 1.10%.

The top-yielding fund remains the PayPal Money Market Fund (402-
935-7733) at 1.35%, unchanged from the prior week.  Seven retail 
money market funds, including Vanguard Prime MMF, have yields in 
the 1.10% to 1.18% range as of last week.    

The iMoneyNet.com MMF average yield (0.78%) remains roughly 50bp 
below the Fed Funds rate, which has stood at 1.25% since the Fed 
last lowered short-term rates.     

Mutual Fund News

According to a recent survey conducted by UBS AG and the Gallup 
Organization, investor optimism in the country is at its lowest 
level since the survey began 1996 amid concerns about terrorism, 
war with Iraq, the U.S. economy and stock market.  According to 
Bloomberg.com, the UBS Index of Investor Optimism slid from "36" 
to just "9" in January, eclipsing the previous low of "29" from 
October 2002.  The survey began in October 1996 with a baseline 
of 124, the Bloomberg article stated.

The Rocky Mountain News wrote an interesting story last week on 
Denver-based Janus Funds and their continued investment in Tyco 
International, believing Tyco can recover from its current woes.  
Janus Capital Corporation, the investment arm of Janus, held 23 
million shares of the stock at year-end according to recent SEC 
filings, valued at roughly $400 million.  The article indicates 
that it was Janus' first SEC filing since announcing they would 
take over management of their sibling Berger funds as part of a 
merger with parent Stilwell Financial.

Speaking of Janus, Morningstar.com reports that Warren Lammert, 
portfolio manager of the Janus Mercury Fund (JAMRX), is leaving 
Janus.  David Corkins will become the fund's portfolio manager, 
having co-managed the fund with Lammert from 1997 and 2001.  He 
also manages the $5.2 billion Janus Growth & Income Fund (JAGIX), 
Morningstar said.  Lammert reportedly will pursue an investment 
opportunity outside the mutual fund industry (i.e. hedge fund?).

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

Steve Wagner
Editor, Mutual Investor 


Transport Trouble
by Mark Phillips

For followers of Dow Theory, Monday's trading session went a long
ways toward confirming that we are still very much in a bear
market.  I don't claim to be an expert on Dow Theory, but I do
tend to keep an eye on what I view as one of the essential
tenets of the theory.  Namely, that a breakdown/breakout in the
Dow Jones Industrials ($INDU) needs to be followed (or preceded)
by corresponding breakdowns/breakouts in the other two dominant
sectors of the market, the Dow Transports ($TRAN) and Dow
Utilities ($DJU).

I first introduced the idea (at least in this venue) of following
Dow Theory back in October of 2002, shortly after the DOW traded
to a new bear market low of 7286, noting that the TRAN had
confirmed that breakdown with a new bear market low of 2013.
Not only that, but the DJU gave another point of confirmation,
with a new bear market low of 167.  We had the full confirmation
with all three of the indices that are central to Dow Theory
breaking to new bear market lows, confirming the ferocity of
the nearly 3-year old bear market.  Rather than rehash that
conversation here, I'll just provide the link to that article,
for any who need to catch up.

DOW Theory Confirmation?

Remember, Dow Theory is not a tool for trading.  Rather it is
a tool for determining the dominant trend of the market.  And
as of early October, the theory was telling us that the bear
market was extremely robust.  What I found interesting though,
was that the next day, all three of those indices (and the rest
of the broad market) had begun a pretty impressive rally.  That
rally continued right up through the end of November, and I
remember having several discussions during that period of time,
where the opinion was offered that Dow Theory just wasn't
relevant anymore.  Oh Contraire!  You see that opinion was
offered by those making the mistake of trying to treat the
theory as a trading tool.  You see, if the October confirmation
was to be shown in error, then each of those indices, INDU,
TRAN and DJU needed to take out their prior rally peaks,
breaking the string of lower highs.  

It is worth noting that NONE of those indices managed to
accomplish that feat before the bears came out to play in
early December.  The INDU got close, posting a closing high on
November 27th of 8931, still more than 100 points below the
August closing high of 9053.  Turning to the TRAN, it came
fairly close as well, but stopped at 244413 vs. the August
closing high of 2463.  The DJU lagged the worst, topping out
at 227 on January 9th, well below the August high of 254.  See
the theme here?  All three indices confirmed the bear market's
longevity with the new lows in October and then provided
another point of confirmation (at least to my way of thinking)
by failing (on all three counts) to trade above a prior high.

That brings us to the current situation.  At 7858, the INDU
is well above its October low of 7286, and the DJU is likewise
well above its October low of 167, closing today at 200.  But
the TRAN really took a severe body blow this morning when Bear
Stearns fired a volley at the Trucking stocks.  Citing the
group's poor performance at the outset of the first Gulf War
due to the elevated fuel costs, the firm downgraded a fistful
of trucking stocks this morning before the open.  Bear Stearns
lowered their rating to Peer Perform on CVTI, HTLD, JBHT, KNGT,
SWFT, and WERN.  The market did not take the news well, with
heavy selling in the trucking group knocking the TRAN back to
2016 at the close, a mere 3 points above the October low.

As I see it, the market is now at a critical juncture.  If the
TRAN falls below 2013 (on a closing basis), it will be the
first domino to fall in a new bear market confirmation.  We'll
then be watching for the INDU and DJU to follow suit.  In that
vein, we can see from the recent market action that the INDU
is the next likely candidate to follow suit, as it rolled over
again today and looks poised to test its lows of less than 2
weeks ago.  If that level (roughly 7750) fails to hold, the
October lows will likely be dead-center in the bears' sights,
as they look to confirm a TRAN breakdown with a subsequent
breakdown in the INDU.  Of the 3 indices, the DJU (amazingly
looks the most solid) as it bounced from its July lows last
week and continued that upward move today, despite the overall
down market.

Remember, this discussion is not about whether we ought to be
long or short the market right now.  It is about whether the
bear market still has all its claws extended.  I believe it
does and will continue with that train of thought until I see
the INDU, TRAN and DJU each rally above a prior rally peak.
There has been a fair amount of discussion in the financial
press lately about whether the bear market is finally just
about wrung out.  I personally think such thoughts are foolish
until we get a signal from Dow Theory telling us that is the
case through price action in these three important indices.

One of the things I love about Dow Theory is that it gives us
a solid objective means to gauge the market.  If the October
lows are violated in each of these indices, then we have
another data point that confirms the bear market is still with
us.  On the other hand, we have concrete price levels to
monitor to determine if the bear is losing its grip.  Here
they are.

INDU below 7286, TRAN below 2013 and DJU below 167, and the
bear remains in force.  INDU above 8931, TRAN above 2421 and
DJU above 227 and we can finally consider the bear to be
loosening its grip on the market.  Everything in between is
varying degrees of bullishness or bearishness in the current
trading range.  

Given the depressed levels of bullish percent in the major
indices right now, I will frankly be quite surprised to see
the INDU, TRAN and DJU trade to new bear market lows in the
near-term.  But if even 2 of these indices were to hit new
lows (TRAN is the most likely, followed by the INDU), I would
expect it to be followed soon thereafter by another solid
bear-market rally.

I'll be more than happy to trade the upside when that rally
arrives, but I will keep in the forefront of my mind that
until the INDU, TRAN and DJU take out their prior rally
highs, it is ONLY a bear market rally.  I will not be taking
long-term bullish positions in the equity market until we get
that bullish confirmation.  That may sound strange, coming
from the LEAPS editor, especially when all of our current
trade candidates are on the bullish side.  But I think it is
a matter of definition of the term "long-term".  While LEAPS
are definitely a longer-term trading vehicle, I think you'll
agree that it is tough to find a trend in anything in the
equity market that has had a trend of more than 3-4 months
lately.  To my way of thinking, 3-4 months is an appropriate
duration for a LEAPS trade in the current market, but
long-term investments are those that should be measured in
years, not months.  So perhaps I should rephrase my prior
statement.  Until the bear goes back into hibernation, the
longest-term bullish trade/investment that I will contemplate
will be along the lines of the candidates we feature in the
LEAPS column.

In the meantime, as we pursue short-term trading gains within
the current range, hopefully this discussion on Dow Theory
gives you another tool you can add to your arsenal for
divining the dominant trend in the broad market.

Questions are always welcome!


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How long will it last? At least until tomorrow. That seems to be 
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The Option Investor Newsletter                   Monday 02-24-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

Stop Loss Updates: None
Dropped Calls: None
Dropped Puts: None
Play of the Day: Put - ATK

Updated on the site tonight:
Market Posture: Tipping Over
Market Watch: Shift Into Reverse

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ATK – Alliant Techsystems, Inc. $47.80 -1.09 (-1.09 this week)

Company Summary:
Alliant Techsystems is a supplier of aerospace and defense
products to the U.S. government, America's allies and major
prime contractors.  The company also supplies ammunition to
federal and local law enforcement agencies and commercial
markets.  ATK designs, develops and produces solid rocket
propulsion systems for a variety of U.S. government and
commercial applications.  ATK is the sole supplier of the
reusable solid rocket motors used on NASA's Civil Manned Space
Launch Vehicles.  The company also designs, develops and
manufactures small-, medium- and large-caliber conventional
munitions for the U.S and allied governments as well as for
commercial applications.

Why We Like It:
While just over a year old, the action in the Defense Industry
index (DFI.X) tells us a lot about what the market thinks about
potential war with Iraq.  Namely, it isn't going to last very
long, and it won't have a significant impact on the bottom lines
of the majority of Defense-related stocks.  After several tests
of the $485 level in the past 6 months, that support finally gave
way big time last week and the sellers really piled aboard on
Thursday, driving the index below $460.  There are a lot of
individual Defense stocks that have a similar chart pattern, but
few look as bearish as ATK.  And the bears have another thing
going for them with the impact to the shuttle program from the
loss of the Columbia shuttle at the end of January.  The stock
broke down hard following that tragedy and after a feeble rebound
to find resistance at prior support near $52, has reversed course
and is very close to dropping to new 52-week lows.  The PnF chart
will generate another Sell signal with a trade at $47, and that
development should really get the stock moving towards its
bearish price target of $40.  The $50 level is now looking like
pretty firm resistance and another failed rebound below that
level would provide a great entry into the play.  Those with a
more cautious approach will want to wait for a breakdown under
the $47 level, which is just below the September 2001 low.
Initial stops are set at $51.50, just below the steeply
descending 20-dma at $51.32.  Monitor the DFI index for
confirmation of continued sector weakness before playing.

Why This is our Play of the Day

Despite the continued looming war threat, Defense stocks had
another dismal day on Monday, with the DFI index plunging below
the $450 level.  Several names in the sector, including LLL, GD
and LMT plunged to new 52-week lows at the close and our ATK
play isn't far behind.  Dropping early in the day, the stock once
again found support at the $47.50 level, rebounded and then gave
back the majority of the rebound by the closing bell.  With the
proximity of this support level, momentum traders could very well
get their wish over the next couple days, with a breakdown under
$47.50.  Entering on that breakdown looks like a viable strategy,
as it will open the door for a fairly quick drop to the next
level of solid support near $44.  With today's failed rebound at
$49, resistance is solidifying and any failed rally in the $49-50
area should still make for a solid entry ahead of the expected

BUY PUT MAR-50*ATK-OJ OI=106 at $3.50 SL=1.75
BUY PUT MAR-45 ATK-OI OI=149 at $1.15 SL=0.60

Average Daily Volume = 614 K

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Tipping Over

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


Shift Into Reverse

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