Option Investor

Daily Newsletter, Monday, 03/03/2003

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The Option Investor Newsletter                   Monday 03-03-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Iraq vs. The Economy
Futures Wrap: Role Reversal  
Index Trader Wrap: (See Note)
Weekly Fund Wrap: Stock Funds Slip, Bond Funds Extend Gains
Options 101: Giving Something Back

Updated on the site tonight:
Swing Trader Game Plan: Upside Dow

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
03-03-2003                  High    Low     Volume Advance/Decl
DJIA     7838.86 -  53.22  7981.46 7822.73   1392 mln  500/864
NASDAQ   1320.29 -  17.23  1353.31 1316.85   1216 mln  251/945
S&P 100   422.18 -   3.18   431.39  420.92    totals   751/1809
S&P 500   834.81 -   6.34   852.34  832.74
RUS 2000  359.31 -   1.21   364.63  358.28
DJ TRANS 2066.08 +  17.03  2084.65 2046.51
VIX        34.09 -   0.06    40.89   36.71
VIXN       45.83 +   0.17    46.02   44.62
Put/Call Ratio 1.02

Iraq vs. The Economy
by Steven Price

Is it all still about Iraq?  It certainly was about the geo-
political picture early on, but some conflicting economic data 
also proved that the economy is still playing a part in traders' 

We got a good snapshot today of reactions to both the geo-
political landscape, as well as current economic conditions. The 
economic worries won out today, but it was only one chapter in a 
very long book. After a Friday afternoon that looked as though we 
had finally exhausted whatever bullishness was left in the 
broader indices, we got some news over the weekend that tipped 
the scales away from an Iraqi invasion.  While it remains highly 
probable that the U.S. will still invade, there were a couple of 
items that made it a little more difficult.  First was the 
expected destruction of missiles by Iraq.  The U.N. weapons 
inspectors requested destruction of Iraq's Al-Samoud missiles, 
which they deemed to have a range beyond that allowed by the U.N. 
resolutions.  Iraq agreed to do so last week, but said they did 
not know how and would require assistance, keeping alive the 
notion that they may just be wiggling.  When the destruction 
began as planned, it was just one more factor that weighed 
against a U.S. invasions Iraq continues to throw bones to the 
U.N. every couple of weeks.  The U.N. weapons inspectors also 
said that they had been allowed to interview more scientists.  
Iraq destroyed more missiles on Monday, but has said it would 
cease complying with the inspectors' request if it appears the 
U.S. will go to war anyway.

The second factor, and possibly an even more important one, was 
the vote by the Turkish parliament on allowing U.S. troops to 
base in its country. What appeared to be a victory for the U.S. 
with more members voting for than against the U.S. plan, quickly 
turned sour when the vote was declared "rejected" by the Prime 
Minister.  The vote fell three votes shy of a majority due to 19 
abstentions.   Turkey's financial markets fell hard on the news, 
after they had rallied on the expectations that the country would 
be receiving U.S. aid that could help ease a $90 billion hole the 
country is facing and large IMF payments facing it. There has 
been talk of another vote, but that likely will not come until 
next week, after parliamentary elections this weekend.  The 
rejection has a big effect on the U.S., which had planned on 
stationing troops in Turkey for an attack on Iraq from the North. 
While the U.S. has said the decision would not alter its overall 
plans, it will require some major re-positioning and could delay 
any military action. The U.S. has said it would be successful in 
an action against Iraq with or without Turkey's help.  My guess 
is still that Turkey eventually takes the much needed infusion of 
aid and allows U.S. troops.  However, just a few days before 
their elections, a topic that does not have popular support there 
may have simply had too much working against it. There were still 
more votes cast in favor of the U.S. plan than against it, so 
there is enough sentiment from those close to the problem to 
build on.  I imagine the 11% decline in their stock market that 
followed the decision will only help the U.S. case.

The arrest of a high-level Al Qaeda operative also gave the 
markets a boost early on.  Al Qaeda operations chief Khalid 
Shaikh Mohammed was arrested in Pakistan and U.S. officials 
seized computers, computer disks, paper documents and cell 
phones, which they will use to try and determine where other 
operatives might be hiding and what plans might be in the works. 

The opening euphoria got another boost from a better than 
expected construction spending report. Construction spending rose 
1.7% in January, to record levels, and also reflected an upwardly 
revised number for December. 

On the negative side, however, was consumer spending.  Analysts 
were expecting a 0.1% rise in nominal consumer spending and 
instead got a reduction of 0.1%.  Overall, consumers reduced real 
spending by 0.3%.  It was only the second time in the last 14 
months that spending has declined. It would also seem to 
correlate to recent numbers from the housing market, which showed 
a big drop in new home sales for January.  One of the biggest 
factors in keeping consumer spending alive, and supporting the 
economy, has been low interest rates.  When we start to see a 
lesser effect in the housing market, it is a red flag for 
spending in general, as it indicates fewer consumers are taking 
advantage of those rates to either extract money from current 
homes or purchase a new one.  While it is not a direct 
correlation, weakness in the housing sector can be used as a red 
flag for spending in general.   

The drop in spending also portends more economic troubles for the 
country, as consumer spending has been one of the only positives 
we have seen in a climate where businesses have refused to spend.  
Consumer spending makes up 2/3 of GDP and a decline may have a 
serious impact on first quarter GDP. Real spending on durable 
goods dropped 5.4%, following a 7.2% increase in December.  That 
was the largest decline in 13 years and reflected a drop in auto 
sales. As consumer debt has reached record levels, some of that 
previous spending is also making it back into savings accounts 
ahead of war concerns.  The personal savings rate grew from 3.9% 
to 4.3%. Personal consumption was also flat, when excluding 
energy.  One of the reasons for a drop in spending can also be 
linked to a smaller than expected gain in personal incomes. 
Personal income grew 0.3%, which was a touch lower than the 
already anemic 0.4% that was expected.

We got reports from several automakers, with GM showing the worst 
results.  GM reported a 19% drop in February sales.  Ford 
reported flat sales and Daimler Chrysler reported a drop of 4.5%.  
The total industry numbers came in below expectations.  

The biggest report we were waiting on was the ISM manufacturing 
report.  Last week's release of the Chicago PMI, which reflects 
manufacturing data in the region, came in better than expected.  
That was enough to get the bulls geared up for this morning's ISM 
release and we rallied into the data release.  Oops.  The ISM 
came in at 50.5% for February, well below the expectations for 
52.0%.  The internals of the report showed both employment and 
new orders down, while prices paid went up. While the 1.5% 
difference between the expected and actual levels may not seem 
like a big difference, its proximity to the 50% level is 
important.  Anything over 50% shows expansion in the sector, 
while anything below that level shows contraction. The trend in 
both indices is down and now bordering on contraction.  While the 
Chicago PMI was better than expected at 54.9, it was still a 
downtick from the previous reading of 56.0.  The disappointing 
report led to a quick turnaround in the Dow, which had once again 
been on its way to testing 8000.  It reached as high as 7981, 
before rolling over and dropping more than 100 points 

The chip stocks have been one of the hotter sectors over the past 
week.  After bottoming around 260, just before we got a bounce in 
the broader markets from our recent lows, the Semiconductor Index 
(SOX) ran all the way up to a test of resistance at 300.  This 
15% gain outstripped the rest of the market and indicated that 
this sector may be leading us higher. While the SOX is only a 
sector index, it has a high correlation to the broader markets, 
as it measures spending and demand for the hard components that 
businesses invest in (or don't). The SOX finally hit the 300 mark 
this morning, topping out at 304, but that move apparently 
brought in the sellers that point to a continued lack of IT 
business spending.  After hitting its morning high, it did a 180-
degree turn and fell back to 285.  It was the first indication 
that we might see a turnaround off the bottom a couple of weeks 
ago when it found support and started creeping higher and if 
today's rejection is any indication, the recent pop in equities 
may be running out of steam. The sector was not helped any by a 
report from UBS Warburg that said the Semiconductor Industry 
Association results for January were below expectations, despite 
some good data coming from Asian source around the Chinese New 
Year. UBS said most categories were down, with the exception of 
Flash and SRAM, but it expects a mild sequential increase in 
February.  That report was out early and we got a morning rally, 
anyway, so the reversal is more likely due to valuation than that 
piece of news. 

Chart of the SOX


While we did get a series of intraday lower highs after the 
initial morning spike, we also got a higher high in the Dow than 
we did on Friday.   While the bullish percents remain in sinking 
columns of "O," indicating an uphill battle for any continued 
rally, we need to note that we have also maintained much of the 
bounce of recent lows in the broader indices.  The Dow touched a 
relative low of 7628 on February 13, before bouncing 400 points. 
We have held onto much of those gains and have mostly moved 
sideways. The 50% mark of those gains is 7852 and that level has 
served as significant intraday support over the past couple of 
days. Today's drop through that level near the end of the day 
also led to a failed bounce just below it, indicating we may now 
be seeing resistance where we have seen recent support. That 
would certainly seem bearish. However, we are seeing a low volume 
market, with no real decisive trend. The point and figure charts 
continue to reverse from bullish "X" columns to bearish "O" 
columns every couple of days it seems.   I highlighted a flag 
pattern forming in the Dow PnF chart last week and that pattern 
has remained as such, indicating indecision in progressively 
smaller trading ranges. The SPX and OEX had been in bullish 
columns of "X" and added another upside box this morning.  Their 
subsequent rollovers would have turned them back down into 
columns of "O" at 835 and 422.50 (2.5 point box) if not for the 
earlier addition to the upside.  If we trade the same lower 
levels tomorrow, they will reverse down.  That can be seen as 
bearish confirmation, but with all of the sudden reversals, it is 
getting harder to simply conclude that we are heading in one 
direction or another.  The main reason, of course, is the market 
sensitivity to world events.  

60 min. Chart of the Dow


PnF Chart of the SPX


What happens if Iraq completes destruction of all of their Al-
Samoud missiles?  Or if the U.S. and Turley reach a new 
agreement?  Or if Saddam heads into exile? We can certainly guess 
at the likely outcome, but we have no real idea what the next day 
will bring.  After all, it seemed like a foregone conclusion that 
Turkey would allow U.S. troops. 

We also got some contrarian indications today from the broader 
market movement.  The Dow Transports, which had been testing 
October lows and underperforming even a sinking equity market, 
got a boost today, most likely from the continued slide in fuel 
prices.  That slide has come as Iraq has begun to comply with 
U.N. requests and U.S. oil inventories have gotten a break from 
the passing of bad weather in the East. The Market Volatility 
Index also finished slightly down on the day, indicating a lack 
of downside fear. It usually rises on market drops and although 
it bounced from intraday lows, it still remained in the red at 
the close. It has tested the 34% level on two recent occasions, 
before equity drops took it back over 35%.  Today it crept just 
over that level in the afternoon to close at 34.09.

It appears that for the moment the trend is down, and I will 
continue to trade that way.  However, without a clear-cut 
pattern, and the possibility that the tide will change quickly on 
world events, I am sticking to risk capital and will likely do so 
until world events are sorted out.


Role Reversal  
By John Seckinger

Both the ES and YM contracts saw their weekly and monthly pivots 
turn into resistance on Monday; however, the NQ is holding onto 
its long-term pivotal level.  It is now time to look deeper.  

Monday, March 3rd at 4:15 P.M. 

Contract       Last    Net Change    High        Low       Volume    

Dow Jones     7837.86    -53.22    7981.46     7822.73      
YM03H         7843.00    -77.00    7980.00     7815.00     26,365 
Nasdaq-100     991.07    -18.67    1023.47      988.40      
NQ03H          992.50    -18.00    1024.00      998.50    227,159
S&P 500        834.81     -6.34     852.34      832.75    
ES03H          835.50     -5.50     853.00      832.00    543,998

Contract         S2         S1       Pivot        R1         R2    

Dow Jones      7721.95    7779.90   7880.68    7938.63    8039.41
YM03H          7714.00    7779.00   7879.00    7944.00    8044.00
Nasdaq-100      965.91     978.49   1000.98    1013.56    1036.05
NQ03H           979.50     986.00   1005.00    1011.50    1030.50
S&P 500         820.38     827.60    839.97     847.19     859.56
ES03H           819.25     827.25    840.25     848.25     861.25

Weekly Levels

Contract         S2         S1        Pivot        R1         R2    

YM03H         7554.00    7737.00    7889.00    8072.00    8224.00
NQ03H          947.25     978.75    1000.25    1031.75    1053.25
ES03H          803.00     822.00     836.25     855.25     869.50

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

Contract        S2         S1        Pivot       R1         R2    

YM03H         7374.00    7647.00    7890.00    8163.00    8406.00
NQ03H          906.75     958.75     990.25    1042.25    1073.75
ES03H          778.00     809.50     836.75     868.25     895.50

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 850.00, exit 840.75, change +9.25
Short 836.75, exit 837.00, change -0.25
Long 834.25, exit 833.75, change -0.50

Total for the day: +8.50
Total for the week: +8.50
Total since inception: +64.25

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) 

On Monday, the ES contract first appeared content above both its 
weekly and monthly pivotal levels (836.25 and 836.75, 
respectively), and even came close to testing its daily R2 level.  
It was just last month when I continued to talk about the "Zone 
of Resistance" from 850 to 854, and bears evidently remembered 
this area as March began.  The key, to me, was that the ES closed 
underneath both of these aforementioned pivotal level.  However, 
notice that the Bullish Percent in the SPX finished higher.  This 
is a "bullish divergence," and should be kept in the back of a 
trader's mind.  

Looking at the chart below, the ES should find support at the 
829, 822, and 816 level.  Resistance is felt from 836 to 839.50, 
and then higher at 845, 850, and then 861.25.  Does it match up 
well with any of the daily levels?  The daily pivot is just above 
this zone of resistance up to 839.50; therefore, it should be a 
solid level to watch on Tuesday.  Also notice that the daily R2 
is at 861.25, exactly corresponding with the long-term 
retracement level.  Daily S1 and S2 do not match up well with 822 
or 816, so their significance should be only slightly diluted.  I 
still feel they will work well for certain hours of the trading 

Chart of ES03H, 120-minute


Taking things to a five-minute chart, having the bullish 
regression channel ahead of time seemed to make a ton of sense.  
The ES failed to hit its daily R2 level, and then fell underneath 
the mid-point of the drawn regression channel; signaling a 
significant change in sentiment.  Moreover, it was great that the 
daily pivot lined up well with the bottom of the channel.  
Risk/reward was then in a trader's favor.  

Chart of ES03H, 5-minute


Bullish Percent of SPX: This indicator rose 0.60% to 34.40 on 
Monday, despite the overall weakness in the S&P 500.  This is a 
"Bullish Divergence," and could portend traders looking to buy 
weakness.  Regardless, this indicator remains in "Bull 
Correction", and a reversal into a Column of X's will not be seen 
until a print of 40%.  Note:  The last column of "O's" ended at 
20 percent.  With that said, this indicator is intermediate term 
bearish for the SPX.  Looking at P&F chart of the SPX, the 
contact added an "X" as 850 was hit; however, weakness during the 
remainder of the session took the SPX under 835 and formed a 
column of O's.  

The March E-mini Nasdaq 100 Contract (NQ03H) 

The NQ contract is slightly troubling.  Why?  The ES and YM are 
looking weak; however, the NQ held its monthly pivot AND saw a 
bullish divergence in its bullish percent (NDX).  Going forward, 
a bearish trader can wait until a close under the 990.25 level; 
however, still expect resistance at the 1000 level.  The 
objective is clearly for a test of 983, and only a move under 980 
will look to break the current bullish regression channel.  The 
NQ did find solid resistance once again at its long-term 
retracement area of 1024.50.  That is based off the move from 
October to December, and will likely not be forgotten soon.  983 
and 941.50 are also Long Term retracement levels.  Just like the 
ES, the NQ will have to rally above some important resistance 
levels before hitting its daily pivot.  Last Tuesday's pivot was 
important all week; maybe the same will hold true this week.    

Chart of NQ03H, 120-minute

Bullish Percent for NDX:  The bullish percent for the NDX 
was unchanged at 35% on Monday, and will stay in "Bear 
Confirmed" status.  It will take a print of 40% to reverse back 
into a column of X's.  The last column of O's ended at a reading 
of 14%.  The NDX, according to P&F charts, will have to get a 
1025 print in order to produce a new column of X's, or a 925 
print to add to the recent column of O's.  Resistance is seen at 
1000 and 1025, with support seen far below at 925.  

The March Mini-sized Dow Contract (YM03H) 

The YM contract, as shown below, tried and failed to hit the top 
of a possible wedge pattern; moreover, weakness during the 
session took the contract underneath its monthly and weekly 
pivotal levels.  Support is seen at 7809 and 7767; however, note 
that the YM can hit its daily pivot without testing either long 
term pivotal level.  Very interesting, and this could be a nice 
bull trap during trading on Tuesday.  I will not begin to think 
bullish unless solid support is tested (7767) or the ES contract 
goes above its daily pivot.  Getting back to the YM contract, 
MACD is also in a wedge pattern, but definitely has room to fall.  
Least resistance in the YM is still slightly lower; however, 
there is certainly enough TIME for the contract to continue to 
gravitate above its long-term pivotal areas and really implode 
volatility.  I will be bearish going into Tuesday, but looking 
more to sell rallies or buy dips.  It 7767 is broken, then I 
could see a trader selling weakness.  

Chart of YM03H, 120-minute


Bullish Percent of Dow Jones: Using P&F analysis, the Dow stayed 
between its range from 7950 to 7800, and a possible apex could 
still form at 7850.  The bearish objective for the blue chips 
remains at 7100, while a buy signal will be given at 8200.  
Resistance is seen at 8150, with support still not seen until 
7600.  As far as the bullish percent is concerned, this indicator 
was unchanged at 13.33% but continues to show oversold 
conditions.  Of course, it will take a move to 20% in order to 
get the index into "Bull Alert" status.  The column of O's 
remains at twenty-three. Note: The last column of O's ended at 

Good Luck. 

Questions are welcomed, 

John Seckinger


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Stock Funds Slip, Bond Funds Extend Gains

Stocks bounced back Thursday and Friday, but it was not enough to 
generate positive weekly returns for stock mutual funds, with the 
benchmark S&P 500 index off 0.8 percent for the five days through 
February 28.  Mixed economic news and the threat of war with Iraq 
continue to keep U.S. stock investors on the sidelines.  European 
and Pacific stocks sustained greater losses for the week than the 
U.S. stock market, so diversifying abroad didn't protect you from 
losses in the States.  The S&P 500 large-cap index has now fallen 
by 4.1% since December 31.   


According to Lipper Analytical Services, all stock fund indices 
were in the red for the most recent weekly period.  Science and 
technology funds, international funds and gold funds were among 
the week's laggards, with some funds in those groups falling by 
more than 2 percent for the week.  U.S. diversified stock funds 
generally held their weekly declines to under 1 percent, by way 
of comparison.

Meanwhile, the mixed U.S. economic picture continues to produce 
bond price gains, and positive results among fixed income funds.  
Lipper's index update shows that all bond fund categories ended 
the week higher, with government and corporate bond funds doing 
well.  The 10-year U.S. Treasury Note yield fell 20 basis points 
to 3.69%.  Although stocks finished lower, the high yield market 
performed well too, with the average high yield fund up 0.9% for 
the week.  

U.S. Equity Fund Group

 Week   YTD
-0.8%  -4.1%  Vanguard 500 Index Fund (VFINX) 
-0.6%  -5.3%  Vanguard MidCap Index Fund (VIMSX)
-1.0%  -5.7%  Vanguard SmallCap Index Fund (NAESX)
-0.7%  -4.2%  Vanguard Total Stock Market Index Fund (VTSMX)
-0.7%  -3.9%  Lipper Large-Cap Core Equity Fund Average 
-0.6%  -3.4%  Lipper Mid-Cap Core Equity Fund Average 
-0.9%  -6.0%  Lipper Small-Cap Core Equity Fund Average
-0.6%  -3.4%  Lipper Multi-Cap Core Equity Fund Average
-1.4%  -0.2%  Lipper Science & Technology Fund Average

As you can see, tech funds incurred the week's biggest losses and 
are now in the red on a YTD basis through February 28, along with 
the other U.S. equity fund categories.  Small-cap funds generated 
the biggest losses among diversified U.S. equity funds, with some 
funds falling in value by more than 1 percent for the week.  Only 
a few U.S. equity funds lost more than 2 percent for the week and 
they generally of the specialty-technology variety.       

Among diversified stock funds with assets of at least $5 billion, 
the week's laggards included Morgan Stanley Dividend Growth Fund, 
Class B (1.6%), Harbor Capital Appreciation (-1.6%), and American 
Funds: New Economy Fund, Class A (-1.5%).  A few large-cap growth 
funds held their own, such as the Janus Fund (+0.1%) and American 
Funds Growth Fund of America (0.0%).  Fidelity Select Electronics 
Portfolio bucked the downtrend in the tech sector to end the week 
higher by 1.2 percent.

International Equity Fund Group

 Week   YTD
-2.5%  -6.3%  Vanguard Developed Markets Index Fund (VDMIX)
-2.0%  -3.7%  Vanguard Emerging Markets Index Fund (VEIEX)
-2.6%  -6.1%  Vanguard Total International Stock Index (VGTSX)
-2.1%  -6.5%  Lipper International Fund Average
-1.6%  -2.9%  Lipper Emerging Markets Fund Average
-2.1%  -5.2%  Lipper Gold Fund Average

With European and Pacific stocks lower, most international funds 
declined in value by more than 2 percent for the week.  Vanguard 
Developed Markets Index Fund, which mirrors the MSCI EAFE index, 
lost 2.5% over the 5-day period, while the average international 
equity fund did only slightly better, losing 2.1% on average for 
the week, per Lipper.  Triggering the European stock decline was 
a drop in European consumer confidence, which fell to its lowest 
level in over 6 years in February while business confidence fell 
for a second month.

Generally speaking, weekly declines were in the 2%-3% range with 
Fidelity Canada Fund the exception.  It rose by 1.2% on the week.  
Harbor International, Fidelity Diversified International and the 
Tweedy Browne Global Value Fund were among those funds to finish 
the week with smaller-than-average losses of closer to 1 percent.   

U.S. Fixed Income Fund Group

 Week   YTD
+0.3%  +0.9%  Vanguard Short-Term Bond Index Fund (VBISX)
+1.2%  +1.9%  Vanguard Intermediate-Term Bond Index Fund (VBIIX)
+2.1%  +2.8%  Vanguard Long-Term Bond Index Fund (VBLTX)
+0.8%  +1.4%  Vanguard Total Bond Market Index Fund (VBMFX) 
+0.2%  +0.8%  Lipper Short Investment-Grade Fund Average
+0.8%  +1.7%  Lipper Intermediate Investment-Grade Fund Average
+0.8%  +1.7%  Lipper Corporate A-Rated Debt Fund Average
+0.9%  +3.6%  Lipper High-Yield Fund Average
+0.8%  +1.2%  Lipper U.S. Government Fund Average

High-yield bonds and funds extended their recent gains last week, 
with the average high-yield fund now up 3.6% since December 31st, 
best in the taxable fixed income group.  The Fidelity Capital and 
Income Fund earned a weekly return of 1.6% to pace the high-yield 
group.  It's up 6.1% on a YTD basis through February 28, 2003.

Investment-grade, intermediate-term funds produced similar weekly 
returns as the 0.8% weekly return for the LB Aggregate index, but 
fell short of the intermediate-term bond index (+1.2%).  For the 
week, Vanguard Intermediate-Term Bond Index Fund returned 1.2% as 
its sibling, Vanguard Long-Term Bond Index Fund generated a nifty 
2.1% total return.  So, while most individuals associate indexing 
with the stock market, the two Vanguard bond index funds have put 
up considerably better returns in 2003 than most U.S. investment-
grade bond funds.

Other long-term bond funds with big gains last week included the 
Vanguard Long-Term Corporate Bond Fund and its sibling, Vanguard 
Long-Term U.S. Treasury Fund.  Both funds produced a 5-day total 
return of 2.1% also.  However, remember the sword is double-edge 
here.  Long-term bond funds could fall hard if and when the U.S. 
economy starts to grow appreciably again and investors return to 
the equity markets.

International Fixed Income Fund Group

Week   YTD
+0.6%  +2.8%  Lipper Global Income Fund Average
+0.2%  +3.2%  Lipper International Income Fund Average

Global and international bond funds were higher also, with some 
funds such as Fidelity Emerging Markets Income Fund producing a 
solid 1.4% return for the week.  Alliance's Americas Government 
Income Fund, Class A scored a 1.8% weekly return for one of the 
better returns among international bond funds.      

Balanced Fund Group

 Week   YTD
-0.1%  -1.9%  Vanguard Balanced Index Fund (VBALX)
-0.3%  -2.2%  Lipper Balanced Fund Average

Most balanced funds were able to minimize losses when compared to 
pure equity funds, demonstrating once again the benefits of asset 
class diversification in choppy economic times.  Those funds that 
overweight bonds relative to stocks in their portfolio closed the 
week with net positive returns.  For instance, Vanguard Wellesley 
Income Fund, which generally invests 60% or more of assets in the 
fixed income markets, posted a positive 0.3% return for the week.  

Money Market Fund Group

1.09%  Vanguard Prime Money Market Fund (VMMXX)
0.77%  iMoneyNet.com All Taxable Money Market Fund Average

According to iMoneyNet.com, the average taxable MMF yield slipped 
one basis point to 0.77%.  Vanguard Prime MMF, a low-cost leader, 
sports a 7-day simple yield of 1.09%, down one basis point versus 
the prior week as well.  

The top-yielding fund remains the PayPal Money Market Fund (402-
935-7733), at 1.34%.  RBB MMP/Sansom Street Class (800-430-9618) 
is next with a 1.16% current yield.

Mutual Fund News

In Morningstar fund news, Fidelity has dropped the front-end load 
charge on the Fidelity Contrafund through June 30 in an effort to 
attract more investment dollars.  It also has eliminated the load 
fees associated with nine regional funds.  Apparently, Fidelity's 
feeling the pinch, like other fund families, as its revenues fall 
due to shrinking asset bases.  For example, at its peak, Fidelity 
Contrafund had over $45 billion in net assets.  Today, the fund's 
assets are $26 billion.  Contrafund has a strong long-term record 
of performance, so investors that avoided the fund because it was 
a "load" stock fund may want to use this window of opportunity to 
jump on board.  

The Morningstar.com story went on to discuss Fidelity's financial 
results for the most recent "full-year" period, in which revenues 
fell by 9% and profits plunged by 39% to $808 million.  Total net 
assets also declined by 7% to approximately $820 billion.  So, it 
has been a difficult 3-year period for even the 800-pound gorilla 
in the mutual fund industry.  

Steve Wagner
Editor, Mutual Investor 


Giving Something Back
by Mark Phillips

One of the most rewarding parts of writing about the financial
markets in this forum is the variety of other traders I have
the opportunity to correspond with.  In fact, I have readers
that regularly write to me from each of the 6 continents (I'm
not yet aware of any readers in Antarctica, but if you're out
there, by all means drop me a line!).  Some are relatively new
to the newsletter and some have been writing to me since I
started contributing to OIN back in late 1999.  While I love
all the variety, by far my favorite group are the new traders.

You know who I'm talking about, as we've all been there.  There
may be some familiarity with trading in general (or even quite
a bit of experience), but they're new to the world of option
trading.  We've all been there, and if you think back on your
own learning curve, isn't it amazing how much you've learned
since getting started in the world of options?

I obviously can't spend much time with every new reader that
comes along or I'd never have time to trade or write these
articles (GRIN), but every once in awhile, a new reader comes
along that shows a genuine interest and willingness to learn
how to win at the options trading game.  Over the past few
weeks, I've been corresponding with a fairly new reader, we'll
call Jerry.  Jerry's fairly experienced at trading stocks, but
brand spanking new to the world of options.  Based on the
discussions we've had up to this point, Jerry appears to be
doing things right in terms of research, proper money management
and at the same time trying to fine tune his business plan.  

I can tell he's working on that business plan by the most
recent question he posed.  He's had a couple of small losses
in his early option trades, and is naturally comparing that
performance to what he knows is possible in the world of just
trading equities.  From that flowed the pivotal question, which
gives us our topic for the day.

When I do all my calculations on IVolitality.com and consider
my strike price and my expiration date and all, and I see that
an option is only going to run, say, sixty-four cents for every
dollar of movement in the underlying stock, and I know that my
option is going to be losing time value every day that the
stock doesn't move so I've got to be real good at judging time,
I find myself wondering-- what is the advantage of trading
options as opposed to just doing the straight-up stock trade.
Apart from controlling risk-- like knowing the maximum amount
one can lose going in to the trade-- and apart from being able
to 'control' more shares for a lot less capital outlay than I
would in a straight stock play, what are the advantages to
options trading v.s. stock trading?

You see, Jerry started out by devouring all the information I
could point him at with respect to option pricing and how an
option will move relative to the underlying stock -- you know,
the Greeks.  You see, he's entering a new endeavor and looking
to relate what he knows (stocks) to what he's trying to learn
(options).  Alright, let's leave Jerry's learning curve aside
for awhile and just deal with the question at hand.

Unless deep in the money, an option will never move
dollar-for-dollar with respect to the underlying stock.  As
I've covered in detail in the past, the amount the option moves
with respect to the underlying stock is determined by the Greek,
Delta.  An ATM option will have a Delta of 50, meaning that for
every $1 move in the stock, the option will move $0.50.  So we
know we're going to need a decent move to make our trade
worthwhile.  Additionally, the clock is always against us, as
buyers of options.  Mike Parnos' cadre of CPTI students know
this fact all too well and are more than happy to take the
other side of the trade, selling premium in well-considered

But let's stick with the idea of buying premium.  If we're
going to do it, we need a target that not only has the capacity
for a large movement, but we also need that movement to happen
in a short space of time, RELATIVE TO THE EXPIRATION of the
option we choose.  If I buy an option that expires in two weeks,
I need a big move and I need it to happen RIGHT NOW!  If
however, I purchase a 2-year LEAP, I have the luxury of time
on my side.  I can wait for the move to take place as the impact
of time decay will be very slight over the next year.  But we're
not just interested in NOT LOSING, we want to MAKE MONEY, right?
For that, we need a stock that moves, and will likely do so in
a short period of time relative to expiration.

The problem with that qualifier is determining when a move is
likely to take place and then allowing enough time by selecting
the right expiration month.  When I first started trading
options, I had a pretty simple rule of thumb.  I picked trades
that I thought had the potential to move at least $2 for every
$1 of risk, and that I thought would start their move some time
in the next 2 weeks.  But the key is that I never bought an
option with less than 60 (preferably closer to 90) days until
expiration.  That gave me time to be right.  I've fine-tuned
that process over the years, but I still think it is an
excellent place to start for new options traders.

I actually wrote a couple articles last year that I think are
germane to this issue.  In case you missed them, I think you'll
find them instructive on the twin topics of which strike price
should I use (relative to where the stock is currently trading)
and how much time should I buy?

Which Option Should I Buy?
Which Option Should I Buy? -- Part Deux

We still have the underlying question that Jerry posed though.
What inherent advantage does option trading have over stock
trading.  Simply put, leverage.  You see, it takes a real
home-run to net a 100% return on a stock trade.  If long, the
price of the stock needs to double to provide that return, and
if short, the price of the stock needs to go to zero.  By
contrast, it really doesn't take that large a move in an ATM
option to generate a 100% return.

Let's look at a quick example to demonstrate the point.  In the
middle of January, shares of AIG looked like they were going to
tip over below the 200-dma, in a continuation of the long
string of lower highs that commenced in the fall of 2001.  At
the time the stock was starting to roll over from the $63 level,
with both daily and weekly Stochastics looking weak.  The PnF
chart was already on a Sell signal, with a bearish price target
of $47.  That looked pretty favorable at the time, with upside
risk limited to the bearish resistance line at $64.  So
positions entered at say $62, had $2-3 worth of upside risk
and $15 of potential reward to the downside.

I don't want to spend a lot of time on the technicals of the
trade setup, but instead want to focus on the potential for
return.  Let's assume that we're just trading the stock.  If
AIG were to fall all the way to the $47 price target (which it
did), that would represent a gain of $15 from the $62 entry
point.  Doing some quick math, that equates to a gain of 24%.
Given that the whole move only took 3 weeks, that is really
quite a respectable trade, even just trading the shares.  But
let's compare it to what would have transpired with if we had
chosen the March $60 put (AIG-OL) as our trading vehicle.
Let's assume our entry into the trade would have taken place
on January 17th, which would have given exactly 2 months until
expiration.  A bit close to the 60-day threshold, but close

My chart service doesn't show any trading for that option prior
to January 21st, so to err on the side of caution, we'll use
the close on that day (when AIG closed at $61.40) as our
reference point.  On 1/21, AIG-OL closed the day at $2.55.  A
few short weeks later, as AIG was beginning to recover off its
low near $46, this option was fetching a very respectable
$11.80 on February 13th!  That wasn't the peak price, but
performing the same simple division produces a gain of 363%!
That is precisely the advantage that option trading holds over
stock trading.  Certainly this is an extreme example, but I
think it clearly demonstrates what we, as options traders
are endeavoring to capture.

Here are a few examples of recent (over the past few months)
moves that set up nicely on the charts and would have delivered
handsomely to traders that had a handful of puts:

AZO - 1/07 - 1/27
CYMI - 1/14 - 1/28
EXPE - 1/16 - 2/04
LPNT - 12/22 - 1/10

Each of these moves would have produced respectable gains for
stock traders, but option traders would have netted fat
triple-digit percentage gains.  This is at the very core of
what option trading can provide, that stock trading can't.

I know there are many traders that will trade options on a
stock, looking for a move of $3-5 over a relatively short
period of time.  That's all well and good, but it doesn't fit
my style.  In my opinion, it doesn't make sense to take the risk
on an options trade (time decay, bid/ask spread, volatility
changes) for a move of less than $5, and my preferred target
is for a move of $8-10.  I know what you're thinking -- there
haven't been very many of those lately!  Bingo!  No matter what
your trading vehicle, the current market is a perilous place to
be.  Aside from surprise news events, it is hard to find a stock
that has moved more than $5-7 in the past month.  Take IBM and
MSFT for example.  Since 1/21, IBM has been confined to a
volatile $76-81 range, with a trend being very elusive.  How
about MSFT?  Since 1/27, this institutional favorite has been
confined to an even tighter range, from $23-25.  It's tough to
make a buck out of that kind of action, unless you have a much
longer time horizon.

So while options have distinct advantages over stock trading,
we must allow sufficient time for the move to take place and
the corollary to that statement is that we want to trade options
on a stock that is either in the midst of a trend move or we
think is ready to get started on one.  Determining what are
viable targets and when, is at the core of what technical
analysis attempts to determine.  It is as much art as science,
but the pursuit of that Holy Grail will likely persist as long
as there are markets to trade.  Hopefully this rambling
discussion will help you (as well as Jerry) to see where the
relative advantages and disadvantages lie between trading
stocks and trading options.  If so, I'll feel that in my own
small way, I am giving something back to the system that has
been so good to me.

Questions are always welcome.


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Upside Dow

Another roller coaster day for those trying to find a discernable 
trend left traders wondering just which was more important - Iraq 
or the economy.

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The Option Investor Newsletter                   Monday 03-03-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

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

Updated on the site tonight:
Market Posture: Disappointing Data
Market Watch: Holding On

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ATK - put
Adjust from $50.50 down to $49.50

UTX - put
Adjust from $62 down to $60





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ATK – Alliant Techsystems, Inc. $46.60 -1.70 (-1.70 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:
Regardless of the gyrations in the broad market the Defense
index (DFI.X) just continues its relentless southward trek,
ending the week at a new all-time low, now below $439.  The
logic behind this move seems to be that any war in Iraq will be
short-lived and is unlikely to have any meaningful impact to the
bottom lines of any of the major Defense contractors.  In
Thursday's update, we expressed concern with our ATK play and
its refusal to go along with the sector to the downside.  Well,
that rally attempt that failed below $50 on Thursday, continued
back down towards strong support on Friday, but once again the
bulls defended the $47.50 level.  The relative strength chart of
ATK vs. the DFI index is still in its month-long ascending
channel, so bears still need to be careful with this play.  That
means we don't want to chase the stock lower until ATK can break
convincingly (read:volume) below $47.50.  Until that breakdown
occurs, the best case for new entries is to fade the rally
attempts like we saw on Thursday.  Momentum traders will need
to wait for the breakdown, confirmed by new lows in the DFI
index before playing.  We're lowering our stop this weekend to
$50.50, just above Thursday's intraday high.

Why This is our Play of the Day

Since we began our bearish coverage of ATK just over a week ago,
the stock has stubbornly refused to break below the $47.50
support level, which was the reaction low on February 3rd.  That
all changed today, as the stock finally broke out of its
relative strength channel compared to the Defense index (DFI.X)
and then proceeded below support at $47.50.  As expected, that
breakdown just kept on going, with the next solid support found
in the $44-45 area.  With the volatile nature of the markets
lately, we're expecting a rebound attempt that ought to fail in
the $47.50-48.00 area.  Since that level was so consistent at
providing support, now that it is broken, it should be equally
consistent at providing resistance.  That failure can be used
for new entry points, but we wouldn't recommend chasing the stock
lower from here.  In fact, conservative traders will want to use
a drop to the $44 level to harvest gains on open positions.
Lower stops to $49.50.

BUY PUT MAR-50*ATK-OJ OI=193 at $3.80 SL=2.25
BUY PUT APR-50 ATK-PJ OI=  1 at $4.60 SL=2.75

Average Daily Volume = 628 K

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Disappointing Data

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


Holding On

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


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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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