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Daily Newsletter, Tuesday, 03/04/2003

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The Option Investor Newsletter                 Tuesday 03-04-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: House Fires and Car Bombs
Futures Markets: (See Note)
Index Trader Wrap: (See Note)
Market Sentiment: And the Walls Came Tumbling Down
Weekly Fund Screen: Schwab Select List: Mid/Small-Cap Funds


Updated on the site tonight:
Swing Trader Game Plan: The Oracle's Out


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      03-04-2003           High     Low     Volume Advance/Decline
DJIA     7704.87 -133.00  7845.71  7704.31 1.42 bln   1136/2064
NASDAQ   1307.77 - 12.50  1321.34  1307.27 1.19 bln   1254/2024
S&P 100   415.36 -  6.82   422.64   415.32   Totals   2390/4088
S&P 500   821.99 - 12.82   835.43   821.96 
W5000    7807.01 -113.40  7924.51  7806.26
RUS 2000  356.51 -  2.80   359.31   356.04 
DJ TRANS 2034.36 - 31.70  2067.46  2033.98   
VIX        36.58 +  2.49    36.58    35.19   
VXN        44.97 -  0.86    46.59    44.84 
Total Volume 2,756M
Total UpVol    489M
Total DnVol  2,211M
52wk Highs  186
52wk Lows   256
TRIN       3.37
PUT/CALL    .90
************************************************************

House Fires and Car Bombs

It was not a pretty day for the markets. Housing sales went
down in flames, auto sales crashed and Greenspan bombed the
markets with words of caution about slower times ahead and
the possibility of a slow down in consumer spending. Terrorists
set off a bomb in the Philippines and the US said it may forget
trying to get a UN resolution and proceed on its own. The 
markets did not react well to this attack from all sides. 

Dow Chart - Daily


 
Nasdaq Chart - Daily


 

Leading the batting order today was the Challenger Layoff 
report which showed a +5% rise in layoffs in February to 
138,177. This is the second monthly gain and shows that
corporations are still cutting employees due the weak outlook. 
The largest number of layoffs were in computer manufacturing,
computer services and non-profit organizations. Rising energy
prices are causing corporations to cut back even further to
protect already skinny bottom lines. 

Chain Store sales rose slightly for the week at +2.0% but 
fell -1.0% compared to last year. There was no big rebound
in the week after the blizzard in the Northeast and analysts
are concerned that war worries are causing an increase in
the cocooning process. 

Disney said today that business at their attractions dropped 
measurably and immediately when the orange alert was issued 
and has not come back. Airlines are seeing less traffic and 
restaurants are warning about slowing sales. The quadruple 
threat of war, terror, economy and gas prices are combining
to squash consumer interest and being home alone has taken
on a positive context. 

Lenar Homes announced a weaker than expected forecast for 
orders in the first quarter and JPM said the stock could
fall -25% from its present level. Needless to say that began
a massive haircut for the entire sector. 

Not to have his thunder stolen by JPM, Greenspan dropped a
bomb this morning when he said he saw home sales slowing as
well. This double whammy tanked builders, home improvement
companies, appliance manufacturers and any other related
industry. He was not done. He said consumers withdrew a
record $700 billion in equity from homes in 2002 or 10%
of all home equity available. He said this bubble brought
about by the very low mortgage rates could not continue and
could slow dramatically going forward. This would lead in
his opinion to a slowing of consumer spending and weaker
times ahead. Sounds like he had a bad nights sleep and
got up on the wrong side of the bed. The markets really
took this news badly and saw it as evidence that the 
current soft patch may be turning into quicksand.  

After posting disappointing sales numbers yesterday DB
Securities cut GM and Ford to a sell. They said recent
developments have led them to be increasingly pessimistic
about the downside risk for automakers over the next few
years. The firm said the annual pace of deflation could
get worse and the lower demand and increased capacity by
foreign automakers was going to provide a rocky road for
automakers. They also said the risk of a prolonged 
economic downturn through 2005 is much greater than is
commonly perceived. Oops! Anything related to autos and
auto parts dropped significantly. 

Adding to the overall investor anguish was comments from
Warren Buffet that stocks were over valued and the market
would probably see some rough times ahead. Buffet said
that sometimes the best action is no action and said he
was on the sidelines until the circumstances played out
and a better investing environment appeared. The Oracle
of Omaha is followed by many investors as a successful
predictor of market action. This prompted another round
of selling by the retail crowd. 

On the war/terror front things are heating up fast. The
US is "reportedly" preparing a 72 hour warning of imminent 
hostile action to allow people like diplomats, UN inspectors,
humanitarian workers, etc, to evacuate the country. This
warning could be issued according to undisclosed sources
any time over the next ten days. Must be a pre-warning
warning by leaking it early. 

The US is reportedly ready to withdraw the UN resolution
instead of face a potential veto. According to analysts
and commentators the US has decided to go it alone and
go soon to avoid any other resolution prohibiting hostile
action from coming to the floor. This is producing a
speeded up time frame for the attack. 60,000 more troops
were ordered to deploy from the US this week including
the 1st Cavalry which was thought to be the confirming 
signal. There was not going to be a war until they were
called up. There were multiple ships ordered deployed
from Norfolk VA today with 8,000 marines and personnel. 
Get this, it was to an undisclosed location. Marines to
an undisclosed location on assault ships? Something else
heating up somewhere? 

The North Korea incident where fighters intercepted a
US spy plane in international waters could be the last
straw in the bluffing match. The US said it was using
all diplomatic channels in dealing with the NK threats
but, and this is a first, "we are not ruling out military
action." With that one line the threat level for a real
conflict with NK just went to critical status. NK has
real weapons and an army 15 time the size of Iraq's.
Unfortunately for NK there is water on two sides and
no need to beg other countries for passage. In reality
I do not expect a conflict and I think the US put the
force card on the table to warn NK they had taken just
about as much BS as they were going to take and the next
time a fighter approached a US plane it might not come
home. The US ordered some bombers deployed to Guam in
order to "deter aggression by NK". Needless to say this 
was another straw on the markets back. 

This week is rushing full speed into a potential train 
wreck. With the news events mentioned above we are already 
on a down hill slide and with the Dow finishing at a five 
month low. The potholes in out immediate future are the 
Fed Beige Book on Wednesday, Factory Orders and the Intel 
mid-quarter update on Thursday and the Nonfarm Payrolls 
on Friday. Also on Friday is the UN inspector report to 
the UN Security Council. With planes, ships and troops
leaving in huge numbers and at an increased pace it does
not appear the US cares about the UN decision. This ramping
up of the attack force could mean it has given up on help
from Tony Blair and others and once that decision is made
there is no reason to wait. 

I think we are approaching a critical timeframe. It appears
the attack is imminent with the "72 hour" warning in the
works. It appears the US will go alone. It appears the 
economy is tanking fast. It appears the war may only 
provide a brief bounce and once that excuse is gone the
economy will take center stage and be exposed to the 
searchlight of truth. Based on today's auto and housing
disasters that searchlight may find more imperfections
than the laser fault finder on the "Are You Hot" reality 
show. As all of these events are fully considered by 
investors the end result may not be pretty. 

With the Dow closing at 7700 I think it is safe to assume
a retest of the October low around 7200 is in our future. 
There is only one more speed bump ahead of us and that is
the 7630 low from Feb-13th. Once that low is passed we will
have wiped out any technical reason to justify disclaiming 
a retest of 7200. Bulls are slowly waking up to this fact
an there was a distinct lack of buyers today. The volume
was VERY light at only 1.4B for the NYSE and 1.2B for the
Nasdaq. This may be total lack of conviction but ships
can sink in calm seas. The lack of buy programs over the
last two days has been very evident. There may not be a
lot of sellers but they are winning the battle. 

The Nasdaq struggled to hold on to gains from last week 
and failed. It closed at 1307 and barely above the critical
1295-1305 low range. Intel will be the key on Thursday but
it is unclear what a guidance affirmation would do. Just
saying the times are tough but we are holding to our 
lowered estimates probably will not give investors much
confidence. 

I had one reader ask me what SPX level was represented by
Dow 7200. That equates to about 770 and the SPX closed at 
822 today. Obviously we know what that trader is thinking
and I would bet there are quite a few institutions that
are thinking the same thing. The bets have been made and
everybody is just waiting for time to expire on the clock. 
Cash is on the sidelines waiting for the next game to begin. 
That game could begin with a bang but it may end with a 
whimper as the April earnings season arrives. We are 
approaching earnings warning season already but it may be 
over shadowed by the start of the war leaving investors 
holding the bag when the actual earnings are announced in 
April. 

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Check the Site Later Tonight For John’s Futures Wrap Article
http://members.OptionInvestor.com/futureswrap/fw_030403_1.asp


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

Check the Site Later Tonight For Jeff’s Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_030403_1.asp


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

And the Walls Came Tumbling Down
by Steven Price 

The breakdown from recent highs continued today - right down to 
another significant level of support.  The bears, however, were 
not to be denied. The recent closing low in the Dow was 7749 on 
February 13.  That day we dropped all the way down to 7628 
intraday, but rallied over 100 points into the close. Today's 
morning low was 7750.81, where we found support and then traded 
sideways for a couple of hours, before rounding higher and making 
up some of the day's losses. The rally was short lived, however, 
eventually failing at 7800 and breaking down below the 7749 
support level. The fact that we first found support and then took 
out the level underscores the bearishness of today's move.

With bullish percents now reaching down into areas we last saw in 
October, the risk has shifted to the point where bears need to be 
aware that oversold conditions could lead to a rebound. That 
being said, we still have not been able to crack the Dow 8000 
barrier on the last couple attempts and we also got bearish 
reversals on the point and figure charts into columns of "O" in 
the SPX and OEX, following that of the Dow.  While those signals 
give us little reason to make the case for going long, we should 
be aware that the Dow bullish percent now sits on an ascending 
trend line from its recent lows in July and October. 

The other factor that seems to create problems for bears here is 
in the techs.  While the Dow has sought out new daily lows, the 
Nasdaq Composite has refused to really give in. In fact, with the 
Dow, SPX and OEX all in negative territory most of the morning, 
the COMP made its way all the way back into positive territory 
mid-day.  I have highlighted the support level at 1319, which was 
the November left shoulder pullback low of the head and shoulders 
pattern formed from October through January.  That level remained 
tough today, with an intraday drop below it once again being 
bought and brought back to just above. In the end, it eventually 
failed and that could be a domino to a break below 1300. We could 
be seeing a similar support to resistance transformation to the 
one at Dow 7800. However, 1300 should again provide support, as 
it did on the last drop and the techs are still holding up 
relatively well compared to the industrials.  The COMP closed on 
Monday at 1320, after a similar trip below that support. 

The news events that sent us lower this morning were the bombings 
in the Philippines. A bomb exploded at Davao City airport on 
Mindanao Island, killing 21 people and injuring 148.  An hour 
later, a second bomb went off at a health center 30 miles away.  
Those events, as well as comments from Warren Buffet that his 
Berkshire Hathaway was doing little in equities and instead 
increasing investment in junk bonds, also sent investors to the 
sidelines. If Buffet now considers junk bonds less risky than 
stocks, it is hard to imagine the average retail trader looking 
to move back into equities.  That was precisely what we saw 
today, but even those comments and the bombings were not enough 
to break that February 13 support. 

The Dow 7800 level had provided several bounces on the way back 
from those February 13 lows and today's drop below that level 
gives bears hope, as it did not provide the same bounce it did on 
February 26 and 27.  It also showed some intraday resistance 
after the 7750 test, as the Dow moved sideways in a 50-point 
range for much of the afternoon. We can focus on 7800 now as the 
next resistance level, since it was previous support and now 
appears to have bears waiting with plenty of supply - at least 
enough to have overwhelmed the bulls. 

While we appear to be stair stepping our way down to successively 
lower levels, none of the recent moves have seen very high 
volume, which suggests traders are turned off from the market 
until we get some resolution on the international front.  Russia 
threatened to use a veto on any U.S. proposal calling for 
military action in Iraq and the U.S. basically said it might not 
call for a vote unless it thinks it will get a favorable ruling.  
That doesn't mean it won't invade, it just means it will have to 
forgo a U.N. coalition and go in on its own, or at least with 
Britain. The Turkish Parliament's rejection of the U.S. plan to 
use its bases further complicates the matter. 

The theory goes that if the U.S. invades without global support, 
we may see an outflow of assets from foreign investors, further 
sinking the stock market.  If we at least get a coalition, it 
reduces that effect and the market may see a relief rally once 
the invasion begins. For now, we should trade what we see and 
that direction remains down.  I have a bearish position, but have 
tightened up my stop to chase the market in case we do get 
another bounce from these levels.  The new relative closing low 
in the Dow is certainly a bearish sign and cannot be discounted.  
However, as bullish percents become more extended to the 
downside, be alert that any bounce can be significant and keep 
your stops nice and tight.


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  7704

Moving Averages:
(Simple)

 10-dma: 7882
 50-dma: 8222
200-dma: 8576



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  822

Moving Averages:
(Simple)

 10-dma:  836
 50-dma:  869
200-dma:  907



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     :  982

Moving Averages:
(Simple)

 10-dma:  997
 50-dma: 1010
200-dma: 1007



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

Dow Jones Home Construction Index (DJUSHB): Alan Greenspan said 
this morning that there is little risk of a housing bubble. Then 
it popped.  Or at least that's the way it felt for anyone long 
the sector, following a speech in which the Chairman said, 
"Refinance and home-purchase originations peaked in the fourth 
quarter of last year. It is difficult to imagine that pace being 
maintained in the current quarter."  He indicated that the 
economy would not be able to rely as much on consumer spending 
derived from this area and the housing stocks took it on the 
chin. The DJUSHB dropped 20 points, or 6%, following the comments 
and also news from Lennar (LEN - $3.91).  LEN released its first 
quarter orders report that showed 7% year over year growth. JP 
Morgan came out and said it was well below their 23% estimate and 
a substantial deceleration from the fourth quarter's 38% growth. 
Morgan said the stock could lose 25% and the entire sector 
followed it down hill.

52-week High: 397
52-week Low : 260
Current:      298

Moving Averages:
(Simple)

 21-dma: 316
 50-dma: 317
 200-dma: 324

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


The VIX bounced from 34% for the third time, as the Dow slid to 
its lowest closing level since last October.  The VIX is derived 
from the OEX, which along with the SPX, has yet to break its 
February low, but is nonetheless testing the downside once again. 
With the move back over 35%, it appears there is plenty of 
downside room in the equities before the VIX reaches 40%, which 
has signaled at least a short term equity rally over the past few 
months.  It finished the day at 36.58.


CBOE Market Volatility Index (VIX) = 36.58 +2.49
Nasdaq-100 Volatility Index  (VXN) = 44.97 -0.86

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.90        415,703       375,782
Equity Only    0.80        290,770       233,771
OEX            0.84         25,907        21,825
QQQ            0.83         23,907        19,810


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

Bullish Percent Data

           Current   Change   Status
NYSE          39.2    - 0     Bull Correction
NASDAQ-100    34.0    - 0     Bear Confirmed
Dow Indust.   13.3    - 0     Bear Confirmed
S&P 500       33.4    - 0     Bull Correction
S&P 100       27.0    - 1     Bear Confirmed

Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

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

 5-Day Arms Index  1.64
10-Day Arms Index  1.53
21-Day Arms Index  1.40
55-Day Arms Index  1.36


Extreme readings above 1.5 are bullish, and readings below .85 
are bearish.  These signals don't occur often and tend be early, 
but when they do, they can signal significant market turning 
points.

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

Market Internals

        Advancers     Decliners
NYSE        901          1908
NASDAQ     1172          1948

        New Highs      New Lows
NYSE        90              120
NASDAQ      86              113

        Volume (in millions)
NYSE       1,412
NASDAQ     1,192


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

Commitments Of Traders Report: 02/25/02

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with 
commercials being financial institutions. 
Commercials are historically on the correct side of 
future trend changes while small specs tend to be 
wrong.  

S&P 500

Commercials made few changes to either side of the equation, 
resulting in a net change of 200 short contracts.  Small traders 
added 2300 contracts to the long side.

Commercials   Long      Short      Net     % Of OI 
02/04/03      414,543   465,678   (51,135)   (5.8%)
02/11/03      412,333   472,156   (59,823)   (6.8%)
02/18/03      423,871   481,871   (58,000)   (6.4%)
02/25/03      424,276   482,476   (58,200)   (6.4%)

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year: ( 16,472) - 10/01/02

Small Traders Long      Short      Net     % of OI
02/04/03      151,174    93,439    57,735     23.5%
02/11/03      161,126    95,618    65,508     25.5%
02/18/03      155,475    91,102    64,373     26.1%
02/25/03      157,790    91,083    66,707     26.8%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 114,510 - 3/26/02

NASDAQ-100

Commercials added slightly to the long side and added 1,200 short 
contracts.  Small traders left the long side alone and reduced
shorts by 2,000 contracts.

Commercials   Long      Short      Net     % of OI 
02/04/03       40,934     50,992   (10,058) (10.9%)
02/11/03       39,412     53,818   (14,406) (15.5%)
02/18/03       38,486     50,501   (12,015) (13.5%)
02/25/03       38,787     51,745   (12,958) (14.3%)

Most bearish reading of the year: (15,521) -  3/13/02
Most bullish reading of the year:   9,068  - 06/11/02


Small Traders  Long     Short      Net     % of OI
02/04/03       25,573     8,648    16,925    49.5%
02/11/03       29,667     8,915    20,752    53.8%
02/18/03       25,482     9,425    16,057    46.0%
02/25/03       25,378     7,431    17,947    54.7%

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

DOW JONES INDUSTRIAL

Commercials increased the long side by 1,000 contracts and left 
shorts relatively unchanged.  Small Traders reduced the long side 
by 700 contracts and left the short side alone. 

Commercials   Long      Short      Net     % of OI
02/04/03       17,596    11,232    6,364      22.1%
02/11/03       19,826    11,800    8,026      25.4%
02/18/03       18,812    11,939    6,873      22.4%
02/25/03       19,985    11,866    8,119      25.5%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
02/04/03        4,583     9,424    (4,841)   (34.6%)
02/11/03        5,390     9,300    (3,910)   (26.6%)
02/18/03        5,561     8,973    (3,412)   (23.5%)
02/25/03        4,872     8,723    (3,851)   (28.3%

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


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******************
WEEKLY FUND SCREEN
******************

Schwab Select List: Mid/Small-Cap Funds 

This week, we screen the mid- and small-cap U.S. stock funds on 
the Schwab Select List to see which ones we like the most based 
on relative return, risk and expense, and other factors.  These 
funds invest primarily in common stock of companies that aren't 
included in the S&P 500 (large-cap) index and typically serve a 
supporting role in one's long-term financial plan.  Mid-cap and 
small-cap equity funds offer greater long-term growth potential 
than large-cap funds, but risk and expense are often greater as 
well. 

The S&P Midcap 400 Index and the S&P Smallcap 600 Index are two 
index benchmarks that you can use to compare the performance of 
mid-cap and small-cap funds.  The Russell 2000 index is a well-
recognized small-cap benchmark as well.  The Russell 1000 index, 
on the other hand, would be good for funds that invest in large- 
and mid-cap stocks.  Another index, the Wilshire 4500 index, is 
essentially the next 4,500 U.S. stocks beyond the S&P 500 index, 
and is a good benchmark for funds that have very broad exposure 
in terms of market capitalization.  In most cases, Vanguard has 
an index fund that serves as a nice proxy for the index return. 

In addition to evaluating fund performance relative to indices, 
we recommend comparing fund performance relative to their stock 
fund category peers.  Once we get our initial universe of funds 
from Schwab's Select List, we'll use various Morningstar screen 
tools that are available at www.morningstar.com.  We'll explain 
what we're doing as we go along, and in the end, we'll tell you 
which funds we like the most now in this group, and why.  Since 
everyone's situation is different, you most likely will want to 
run your own screen, and do your own homework before investing.  
That includes visiting fund family websites for information and 
reading fund prospectuses to understand risk factors, costs and 
expenses.

Screening/Evaluation Process

Last week's Fund Screen report identified 21 large-cap U.S. stock 
funds on Schwab's Select List.  In the mid/small-cap group, there 
are 19 stock funds to choose from, most of which can be purchased 
on a no-load, no-transaction fee basis through Schwab's OneSource 
program.  Below is a summary of the 19 mid/small-cap funds on the 
Schwab Select List. 

 Schwab Select List: Mid/Small-Cap U.S. Stock Funds
 Bjurman Micro-Cap Growth (BMCFX)
 Royce Low-Priced Stock (RYLPX)
 Hennessey Cornerstone Growth (HFCGX)
 Royce Premier (RYPRX)
 Meridian Growth (MERDX)
 Ariel (ARGFX)
 FMI Common Stock (FMIMX)
 ABN AMRO/Talon Mid Cap (CHTTX)
 Loomis Sayles Small Cap Value (LSCRX)
 T. Rowe Price Small-Cap Stock (OTCFX)
 Rainier Small/Mid Cap Equity (RIMSX)
 Vanguard Small Cap Index (NAESX)
 Aegis Value (AVALX)
 American Century Small Cap Quant (ASQIX)
 Berger Mid Cap Value (BEMVX)
 Boston Partners Small Cap Value II (BPSCX)
 Buffalo Small Cap (BUFSX)
 C&B Mid Cap Value (CBMDX)
 SsgA Aggressive Equity (SSAEX)

Next, we entered the 19 ticker symbols into Morningstar's Fund 
Compare tool at www.morningstar.com to get updated information 
through yesterday's close.  Schwab's numbers are through month- 
end.  So, for a small amount of manual input you can get up-to-
date fund performance information.  Once you input the symbols 
into Morningstar's system, you can manipulate the data is many 
ways, allowing you to customize your screen to meet your needs.  
Or you can simply use Morningstar's pre-defined "Views" in the 
Fund Compare tool. 

In the "Nuts & Bolts" View, we checked to see if any funds are 
currently closed to new investors and none of them are.  Three 
funds had minimum initial investments of $5,000 or more, so we 
checked to see if their minimum initial requirements were less 
for tax-deferred IRA accounts.  The Aegis Value Fund carries a 
$10,000 minimum initial purchase for regular accounts and just 
$3,000 for IRAs.  Bjurman's Micro Cap Growth Fund has a $5,000 
minimum initial investment for regular accounts and $2,000 for 
IRAs.  Both of those can stay, but we had to eliminate Rainier 
Small/Mid Cap Equity Fund because it has a $25,000 minimum for 
both regular and IRA accounts.

None of the 18 remaining funds have front-end or back-end load 
charges.  Current expense ratios range from a low of 0.27% for 
Vanguard Small Cap Index Fund, to a high of 1.80% for both the 
Boston Partners Small-Cap Value II and Bjurman Micro-Cap Growth 
funds.  The Morningstar "all-funds" average is 1.40%, so a few 
funds on the list have above average operating expenses, which 
may hurt their relative performance.  American Century's small-
cap quant fund and T. Rowe Price's small-cap fund were the two 
other funds (besides Vanguard Small-Cap Index Fund) to have an 
annual expense ratio of less than 1.00%.

While in the "Nuts & Bolts" view, we also sorted manager tenure 
to see which funds may have recently undergone manager changes.  
In the cases of the Cooke & Bieler (C&B) Mid Cap Value Fund and 
State Street Global Advisors (SSgA) Aggressive Equity Fund, the 
data was not available.  That could signify that recent changes 
were made.  In both cases, the fund utilizes a "team management" 
approach, which emphasizes the process over people.  We'll give 
the funds the benefit of the doubt for now.  In all other cases, 
the current portfolio manager(s) has a tenure of at least three 
years.  

Next, we looked at the "Portfolio" view to see which stock funds 
are more mid-cap oriented and which are more small-cap oriented 
based on their average market capitalization.  Here, we saw that 
the average market cap of the SSgA Aggressive Equity Fund was at 
$9.2 billion per Morningstar, high relative to other mid-cap and 
small-cap funds.  That means it has some large-cap qualities and 
may not offer as much diversification as would a mid-cap only or 
small-cap only fund.  So, at this point, we decided to eliminate 
the SSgA fund from consideration.

Since value and growth outperform at different times in the U.S. 
market cycle, we looked to identify funds with "blend" or "core" 
style characteristics - giving them preference over other funds.  
Five funds caught our eye in that regard, including four mid-cap 
blend funds and one small-cap blend fund.  Below is a summary of 
the five funds that are classified as blend funds by Morningstar 
and have average market caps of over $1 billion but less than $2 
billion.  You can go lower than that if you like, but this range 
allows you to achieve potentially greater returns over time than 
large-cap U.S. stock funds, with less risk than pure small stock 
funds.  

 Blend Style and Avg Mkt Cap $1B to $2B:
 ABN AMRO/Talon Mid Cap (CHTTX) $1.9 Billion Avg Mkt Cap
 C&B Mid Cap Value (CBMDX) $1.7 Billion Avg Mkt Cap
 FMI Common Stock (FMIMX) $1.3 Billion Avg Mkt Cap
 Hennessey Cornerstone Growth (HFCGX) $1.2 Billion Avg Mkt Cap
 Ariel (ARGFX) $1.1 Billion Avg Mkt Cap

While these funds have desirable style characteristics, "style" 
is just one piece of the puzzle.  In the "Performance" View, we 
looked to see if low expense ratios and blend styles do in fact 
translate into consistent strong returns relative to fund peers, 
and found that the answer was generally "yes."  Below is a fund 
performance summary as of March 3, 2003, using Morningstar data.

 3-Year Annualized Returns/Category Rankings:
 + 4.2% ABN AMRO/Talon Mid Cap (CHTTX) 8th Percentile 
 +16.0% C&B Mid Cap Value (CBMDX) 2nd Percentile 
 + 8.1% FMI Common Stock (FMIMX) 5th Percentile
 + 1.0% Hennessey Cornerstone Growth (HFCGX) 2nd Percentile 
 +14.7% Ariel (ARGFX) 7th Percentile

 5-Year Annualized Returns/Category Rankings:
 + 3.9% ABN AMRO/Talon Mid Cap (CHTTX) 21st Percentile 
 + 7.8% C&B Mid Cap Value (CBMDX) 2nd Percentile 
 + 3.4% FMI Common Stock (FMIMX) 27th Percentile 
 + 7.1% Hennessey Cornerstone Growth (HFCGX) 6th Percentile 
 + 4.7% Ariel (ARGFX) 10th Percentile

You can see that fund performance in these five funds has been 
above average to high over the past three to five years.  Note, 
however, that only ABN AMRO/Talon Mid Cap and FMI Common Stock 
funds are true mid-cap blend funds.  C&B Mid Cap Value Fund is 
really a mid-cap value fund that has recently moved into blend 
territory and so its rating is relative to other mid-cap value 
funds, per Morningstar.  Hennessey Cornerstone Growth Fund has 
gone from a small-cap growth style in 2000, to a mid-cap value 
style in 2001, and then to a mid-cap blend style in 2002.  For 
this reason, the fund may not be appropriate for style purists.  
Morningstar compares it to other small-cap growth funds but it 
looks to be more like a mid-cap blend/mid-cap growth fund now.

Since Ariel Fund takes a long-term view when buying stocks and 
has low portfolio turnover, its style can drift into the blend 
style box, but it still makes stock purchases based on "value" 
criteria.  So, its small-cap value categorization is probably 
still appropriate even though it now has blend characteristics.  

In the next section, we tell you which funds we like, and why.

Favorite Funds

Three funds stand out in our opinion based on return, risk and 
expense, and other factors including portfolio characteristics, 
management style and manager tenure.  In the mid-cap range, we 
favor the two true mid-cap blend funds, ABN AMRO/Talon Mid Cap 
Fund (CHTTX) and FMI Common Stock Fund (FMIMX).  The small-cap 
fund we like is the Ariel Fund, one of our perennial favorites.




 



The ABN AMRO/Talon Mid Cap Fund has been run by Thyra Zerhusen of 
Talon Asset Management since June 1999.  She seeks to achieve the 
fund's long-term growth objective by investing primarily in the 
stocks of mid-sized U.S. companies with attractive earnings and 
dividend growth, cash flows and balance sheet assets.  In stock 
selection Zerhusen is reluctant to pay an excessive premium for 
growth, consistent with Talon's value style.  The fund also has 
growth characteristics, so overall you could say that it's more 
of a blend or "core" mid-cap fund.

Relative to other mid-blend funds, Talon's risk has been higher 
than average but so have its relative returns.  Per Morningstar, 
the fund sports a trailing 3-year average annual return of 4.2%, 
19.0% better than the S&P 500 large-cap index and ranking in the 
8th percentile (top decile) of the mid-cap blend fund category.  
The fund's trailing 5-year average annual return of 3.9% topped 
the S&P 500 index by 7.1% a year on average and ranked the fund 
in the category's top 21% (first quartile). 




 



Ted Kellner of Milwaukee-based Fiduciary Management Inc. is the 
original fund manager of FMI Common Stock Fund (FMIMX), a stock 
fund which started operations in 1981 and seeks to achieve long-
term growth by buying good businesses at value prices.  In stock 
selection, Kellner favors intermediate and small-sized companies 
with low relative prices, strong financials, and future earnings 
power.  Like the Talon sub-advised fund, the FMI fund's style is 
subject to drift into the "blend" style box since the fund takes 
a long-term view in its equity investments and has low portfolio 
turnover. 

Conclusion

Ariel Fund (ARGFX) has been managed by John Rogers Jr. since its 
inception in 1986 and follows a similar value style as the Talon-
advised mid-cap product and the FMI common stock fund.  It takes 
a long-term view as well and has low turnover.  So, it can drift 
into the "blend" style box also.  But, its average market cap is 
usually towards the upper end of the small-cap range.  All three 
of our favorite funds are reluctant to pay an "excessive premium" 
for growth, so they have been able to earn solid returns over the 
long run while avoiding excessive risk relative to similar funds.

For more information, go to the various fund family websites.   

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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SWING TRADER GAME PLANS
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The Option Investor Newsletter                  Tuesday 03-04-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: TECD
Dropped Puts: ATK
Daily Results
Call Play Updates: BDX, ZMH, SLAB, AMGN, DGX, MME
New Calls Plays: None
Put Play Updates: BBOX, MHK, SYY, VZ, UTX
New Put Plays: XL, PII


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

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


CALLS:
*****

TECD  $ 21.75 -0.71 (-0.87 for the week)  Tech Data announced 
this morning that it had acquired Soft Europe SA, a privately-
held graphics software distributor.  Although terms of the deal 
were not disclosed, investors seemed to react to the news with a 
clearly bearish bias.  TECD suffered from selling pressure 
throughout the session and finished with a 3.1% loss.  Meanwhile, 
the NASDAQ didn't even give back a full percentage point.  
Technically, we are not encouraged by the potential reversal 
pattern on the daily chart.  TECD topped out at $23.21 (78 cents 
below our profit-target) on Monday morning and has since trended 
steadily lower.  Coincidentally, the stock closed at $21.75 - 
exactly where we picked TECD two weeks ago.  Bulls will point out 
that the stock is still holding above short-term support at 
$21.60 and hasn't yet broken the recent uptrend.  But in light of 
the recent reversal, bearish daily stochastics (5,3,3), and 
weakening broader market, it looks like odds are stacked against 
a rally back to the relative highs in the near future.  We've 
elected to close this play at current levels.  Traders willing to 
take some heat could maintain long positions with a stop slightly 
under last week's low of $20.95.


PUTS:
*****

ATK $47.41 +0.81 (-0.89) As good as yesterday's break below the
$47.50 support level looked, the Defense stocks came back on
Tuesday, raising ATK back to that broken support (now resistance)
level.  Normally this wouldn't be a signal to drop the play, but
the relative strength of the DFI index coupled with strong
rebound in ATK has us deciding to exit while the getting is
good.  Traders opting to stay in the play should ratchet their
stops down to $48, as a push back above that level would break
the downtrend of the past few days, as well as signal that the
$47.50 level is not behaving as the resistance that we expect it
should.


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

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

CALLS              Mon    Tue

AMGN     54.12   -0.90   0.27  Consistentcy
BDX      33.48   -0.23  -0.64  Trend line support
DGX      51.55   -0.73  -0.97  Weak but holding
MME      35.40   -0.15  -0.10  Bounce from $35
SLAB     26.52   -0.85   0.02  Relative Strength
TECD     21.75   -0.34  -0.71  Drop, Long enough
ZMH      43.65   -0.96  -0.05  Still engulfed


PUTS

ATK      47.41   -2.00   0.81  Drop, Sector bounce
BBOX     39.78   -1.00  -0.11  Back under $40
MHK      47.38   -0.82  -1.18  Homebuilder news
PII      46.35   -0.69  -1.36  New, Durables down
SYY      26.30   -0.70  -0.50  $25 test next?
VZ       34.41    0.22  -0.40  Lower highs
XL       68.50   -0.80  -0.45  New, Failed bounce


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

BDX $33.48 -0.64 (-0.92 for the week) With little company 
specific news the past month, we are left to predict BDX's fate 
based on recent chart action.  BDX did announce a new IT system 
that extends the company's internal business processes with BDX 
customers.  However, the stock pretty much fell victim to the 
pullback in the broader markets the past couple of days.  After 
cracking the $34 barrier, then finding support, it finally rolled 
over and pulled back to $33.48.  It remains above recent support 
in the $32.50-$33 range and actually has held up well during the 
recent market slide.  There has also been little change to the 
PnF chart, where it sits at $34 and right against the bearish 
resistance line at $35. If the higher low holds up, then the next 
bounce should test that line. the stock currently rests on a 
rising support trendline connecting the lows from its last bounce 
off the 50-dma on February 13. With only a minor pullback and 
support still in place, we will leave our stop at $31.98.  New 
entries can play a bounce from current levels over that support 
at $33.  If we continue the market drop and BDX heads down below 
$33, we would not recommend new entries until we see evidence of 
support. 

---

ZMH $43.65 -0.05 (-0.74 for the week) ZMH lost only a nickel 
today in spite of the broad market sell-off, finding support 
after losing some ground with the rest of the market the past few 
days. It found that support right around the breakout level from 
the end of February and above the rising 21-dma. While it has 
given back some recent gains, it still remains within the bullish 
engulfing candle of February 25. There has been no company 
specific news since its latest report on the new knee replacement 
procedure that does less damage and shortens patients' hospital 
stays. The PnF chart remains on a buy signal at $45 and will only 
reverse on a trade down to $42.  We are going to raise our stop 
on the play to $41.95, which would amount to a break in the 21-
dma and a PnF reversal down.  The breakout to all-time highs in a 
sinking equity market has been difficult to maintain and if it 
cannot hold the support level it found on its recent breakout, we 
will let it go. New entries can target a bounce from that 21-dma, 
which sits at $42.79, but if we head lower than that, we would 
not recommend new entries until we get a test of the new stop.

---

SLAB $26.52 +0.02 (-0.60 for the week) The Semiconductor Index 
(SOX) continues to outperform the broader markets, with a loss 
today of only 2 points, or less than 1%.  It shouldn't be 
surprising with stocks like SLAB, which refuse to give up much of 
their recent gains.  While the stock continues to fight with 
resistance at $27, closing above that level just once last 
Friday, it is not giving much back either. In spite of a drop of 
12 points in the COMP, SLAB managed a small gain of +0.02.  The 
stock has not only managed to out perform the market, but also 
shows great relative strength versus the SOX itself.   This can 
be seen with a succession of buy signals on the relative strength 
point and figure chart versus the sector index. For those traders 
who would like to follow SLAB's business plans more closely, the 
company will be the CFO will be presenting an overview of the 
company's business and products at the Deutsche Bank 2003 
Information and Technology Hardware Conference on March 11.  The 
presentation will be simulcast through the company's investor 
relations section of their website (www.silabs.com). One of the 
reasons SLAB may be having trouble getting past $27 is the 
bearish resistance line on the point and figure chart at $29.  It 
has already posted a box at $28, with its intraday high from 
February 20 and it will take a trade all the way to $30 to 
breakthrough that line.  Today's bounce off $26 (low of $26.06) 
is encouraging and aggressive traders can initiate positions with 
continued support at that level.  Be aware, however, that the 
stock has traded within a $2 range for the past couple of weeks 
and premium erosion is becoming a factor.

---

AMGN $54.12 +0.27 (-0.52) As much as we would have liked to see
AMGN finally break through the $55 level, it is somewhat
reassuring to know that the pattern of the past few weeks
hasn't changed.  Each time AMGN tags a new intraday high, it
pulls back to confirm support at a higher level.  Yesterday's
push up to the $54.95 level brought about some selling and the
stock proceeded to fall back before a slight rebound from the
$53.50 level.  That rebound just wasn't sustainable in the face
of the broad market weakness on Tuesday and after finding
resistance at a slightly lower high $54.76, AMGN pulled back to
just above the $54 level.  That's the long way of saying that
AMGN is in the process of dipping back to test support again
after another failure to break above $55.  But it sill looks
pretty strong in light of the broad market weakness and even
the BTK index ending the day in the red.  The ascending trendline
we've been following has now risen to $52.70, so a dip and
rebound from around $53 is likely to be our next solid entry
into the play while we wait and watch for the stock to finally
crack the $55 level.  Raise stops to $52.50 tonight.

---

DGX $51.55 -0.97 (-1.21) After an encouraging start with a push up
near $55 last week, our DGX play has been faltering over the past
few days, now nearing major support at $51.  While a part of the
weakness could be attributed to the completion of the Unilab
acquisition, it seems more likely that the stock is simply
responding to the weakness in the broader market.  The key right
now is whether support at $51 will hold, and if it does, the
rebound from that level should provide an ideal entry into the
play.  Recall the PnF chart generated a Buy signal with the trade
above $54 last week, and that should tilt the supply/demand
balance in favor of the bulls.  So the plan is simple.  Buy a
rebound from support near $51, and keep a tight stop set at
$50.50.  More conservative traders may want to wait for the
rebound to push back over the $52.50 intraday resistance level
before entering the play.

---

MME $35.40 -0.10 (-0.35) Becalmed.  A term that refers to a
sailing vessel without the benefit of wind, it applies equally
well to our MME play.  After being triggered to active status
last week with a push up through the $35.25 level, the stock
has been vacillating between the $35-36 levels unable to break
free.  Given the negative market environment so far this week,
it is actually encouraging that MME is now finding support at
$35, a prior resistance level.  But we need an upward move to
make money and the way things are shaping up, it looks like the
play is going to need the support of the broad market (or at
least for it to stop falling) in order to continue northwards.
Intraday dips into the $34.50-35.00 (further supported by the
200-dma at $34.45) look good for new entries in advance of the
next leg of this upward move.  Maintain stops at $33.50.


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

None


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

BBOX $39.78 -0.12 (-0.88) Almost as if catering to our whims,
our BBOX play got started last week with an oversold bounce that
stalled out just below the $41 level.  Anxious bulls tried to
build on that rebound yesterday, but to no avail.  BBOX ran into
selling pressure just below the 200-dma ($41.37) and then
proceeded to give back all of Friday's gains by the close.
Buyers made another attempt on Tuesday, but this time were
turned back at the $40.50 level (near the converged and 10-dma
and 20-dma).  Daily Stochastics are just starting to turn a
short-cycle bearish reversal, and with the broad market looking
weak, BBOX looks like it will soon take out its recent lows just
below the $39 level.  That rollover near $41 offered just about
the ideal entry into the play, although a successive failed
rebound below that level can still be used for new entries.
Traders wanting confirmation before playing will need to wait
for BBOX to break below the $38.50 level before entry, while
keeping in mind the possibility of a near-term bounce from the
$37.75 level.  Keep stops set at $41.75.

---

MHK $47.38 -1.18 (-2.00) After another weak bounce late last
week, our MHK play had really painted itself into a tight wedge
that seemed to be converging on the $49 level, and which ought
to break by early this week.  Clearly a catalyst was needed to
break the logjam, and the disappointing ISM data yesterday
morning seemed to do the trick, driving the stock down to just
above the $48 level by the close.  That weakness persisted today
as the recent decline in the housing reports began to sink in,
exacerbated by Alan Greenspan's cautious comments on the
refinancing market, which he expects to moderate in 2003.  MHK
gapped down this morning and kept on going throughout the day,
closing at its low, which also happens to be a new post-October
closing low.  Traders that took advantage of the failed rally
near $50 last week got a great entry and now the $48.00-48.50
area is shaping up as decent overhead resistance.  A failed
rebound in that area can be used as a new entry point, and with
the weakness over the past two days, we can also entertain the
idea of new entries on a break below $46.50, just below the
February low.  One other point of interest is that volume has
been rather brisk so far this week, with the stock trading 50%
more shares on Tuesday than the ADV.  With the breakdown over
the past couple days, we're lowering our stop to $50, just
above last week's intraday highs.

---

SYY $26.30 -0.50 (-0.82) A slave to the broad market since we
began coverage over the weekend, SYY is continuing its persistent
downward trek.  After breaking below the $27.50 level late last
week, there just isn't a lot of support to prop the stock up.  In
fact, based on the breakdown from the broad topping formation,
we're targeting the $22 level on the downside, a level the
corresponds nicely with both the PnF bearish price target and
the stock's lows last July and in September of 2001.  We were
looking for a slight rebound back to the $27.50 level early this
week to give us a decent entry into the play and that is
precisely what happened shortly after the open on Monday.  SYY
popped up to $27.55 and then promptly reversed course, ending
near the low of the day and continuing that slide on Tuesday.
There's no question that support has now failed and any
successive rebound failure below that $27.50 level can still be
used to enter the play.  With the dramatic increase in selling
volume, SYY may just continue earthward without a bounce, so
traders that don't want to miss out can use a break below $26
to open new positions.  Lower stops to $28.50, just above last
week's high and the 20-dma ($28.32).

---

VZ $34.41 -0.40 (-0.17) What's it going to take for VZ to finally
break down?  After the failed rebound last week, the stock has
continued to drift lower in a series of lower highs and lower
lows.  But there has been a firm floor at the $34.25 level that
the bears just haven't been able to crack.  At least not yet.
The price pattern of VZ looks like it will break down under that
support level and when it does, should fall fairly quickly to
the next level of tangible support near $33.  One of the things
that is clearly lending support to the stock is the PnF bullish
support line at $34, and it will take a trade at $33 to finally
crack that line.  We continue to favor entries on failed rallies
below the $35.75 level in anticipation of that eventual
breakdown.  Entering on a break below the $34.25 level may work
for aggressive traders, but they need to be on the lookout for
an oversold rebound until that $33 level is broken.  Lower stops
to $36.

---

UTX $56.98 -0.82 (-1.60 for the week) UTX finally broke down 
below the support it was finding just below $58.  We had 
recommended new entries wait for a trade of $57.50 to get a 
decisive break, and the stock kept going.  It added another box 
to its breakdown of bullish support on the PnF chart at $59 and 
appears on its way to testing the next likely support level at 
$55.  While UTX has exposure to the defense industry, which 
finally saw a bit of a bounce today, and aerospace, which did 
not, it also has some involvement with the automakers.  It is in 
the fuel cell business and has recently signed an agreement with 
Nissan to develop these environmentally safe oil alternatives. 
While that may sound great on paper, it didn't help UTX today, as 
the automotive sector sold off following GM's report that it saw 
a 19% decrease in sales in February. The automakers got a "sell" 
rating this morning from DB securities and anyone with a 
connection seemed to get sold off along with them.  DBS said it 
was concerned about U.S. demand and the risk of a prolonged 
downturn.  It was enough to filter down to this put play, which 
has shown no signs of a bounce, especially now that the support 
just above $57.50has given way. If the Dow does bounce after 
today's drop, then look for this component to stall below $58.  
If it does, aggressive traders can use the failed rally to 
initiate new positions.


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

XL - XL Capital - $68.50 (-2.44 for the week)

Company Summary:
XL Capital Ltd, through its operating subsidiaries, is a leading 
provider of insurance and reinsurance coverages and financial 
products to industrial, commercial, and professional service 
firms, insurance companies, and other enterprises on a worldwide 
basis. As of December 31, 2002, XL Capital Ltd had consolidated 
assets of approximately $35.6 billion and consolidated 
shareholders' equity of approximately $6.6 billion. (source: 
company release)

Why We Like It:
The general reason most bulls give for not shorting insurance 
stocks in the ability to raise rates to cover any shortfalls from 
miscalculations in risk or in premiums.  A recent Prudential 
Securities survey indicated that would again be the case heading 
into 2004. So why would we want to take on that risk? Well, XL 
has shown us that the ability to raise its rates has not been 
enough to save it from the ax traders and analysts have recently 
taken to it, culminating with today's failed bounce below 
previously significant support that was broken on Monday. the 
stock has been following the broader markets lower, but also got 
individual attention from Wachovia on Monday. The stock was 
downgraded based on its premium relative valuation and concerns 
over ongoing losses, charges, and reserve strengthening on 
businesses that XL has acquired or invested in.   While raising 
rates may help, it does not appear that the strategy will be 
enough to offset some of the other skeletons in the closet.

The stock has once again rolled over after a failed bounce off of 
$70 took it up to $73.70.  That $70 support level held XL going 
all the way back to late August and early September, with 
numerous successful tests over the past six months.  The level 
was finally breached on Monday and while the break of longtime 
support can sometimes be a bull-trap, it does not appear to be 
the case here. While the stock did attempt a rebound, it found 
resistance at $70, indicating that support has now turned into 
resistance, as is common when it takes a lot of supply to 
overcome demand at a long time significant level. After that 
failed bounce, it headed lower and put yet another box on its 
point and figure chart, which had registered at sell signal at 
$69.  There is some PnF support going back to last August at $67 
and it could be a speed bump on the way down.  However, below 
that level, there is little to prevent the stock from falling as 
low as $59. We like entries from the current level, but after a 
broad market sell-off, we could be in for some type of bounce on 
Wednesday. If the stock were to bounce back over $70, we would 
likely wait for a collapse back below that level to initiate a 
position.  If we head lower, then we like momentum entries on a 
trade back below $68.  Keep in mind the possible support at $67, 
however, when entering on a momentum drop.

BUY PUT MAR-70*XL-ON OI=293 at $3.70 SL=1.85
BUY PUT APR-70 XL-PN OI=90 at $4.90 SL=2.45

Average Daily Volume = 734 K


---

PII - Polaris Industries, Inc. $46.35 -1.36 (-2.05 this week)

Company Summary:
Polaris Industries designs, engineers and manufactures all
terrain vehicles (ATVs), snowmobiles, motorcycles and personal
watercraft(PWC).  The company markets them together with
related replacement parts, garments and accessories through
dealers and distributors, principally located in the United
States, Canada and Europe.  ATVs are four-wheeled vehicles with
balloon style tires designed for off-road use and traversing
rough terrain, swamps and marshland.  Snowmobiles have been
manufactured under the Polaris name since 1954.

Why We Like It:
As Consumer Confidence has continued to wane and Joe and Jane
average have gotten progressively more careful about where they
are spending their hard-earned dollars, leisure spending is sure
to be one of the first items to go.  Add in the fact that people
seem to be more concerned about terrorist activities (a fact
highlighted by the falloff in business at Disneyland) and the
leisure sector seems to be in for another rough patch this year.
As the manufacturer of many of the "Big Boy Toys" like
snowmobiles and Personal Watercraft, PII is going to be right
on the front lines of products consumers are likely to decide
they don't need right now.  It wasn't that long ago that we
played the downside in PII, based on the abysmal looking PnF
chart, but our stop got taken out on a short-covering bounce a
couple weeks ago.  With the broad market seeming to be making
up its mind about direction (down), PII broke out of its recent
consolidation to the downside on Tuesday and with some conviction
too.  Giving up nearly 3% on fairly robust volume, it looks like
the bears have decided to make a push towards the next level of
firm support near $44.  But our eventual target will be for a
push down near the $40 level and possibly a test of the September
2001 low near $35.  The 20-dma ($48.68) is still providing firm
resistance, which is confirmed by the band of resistance near
$48.50 from the past week.  A failed rally attempt below that
level would make for an ideal entry into the play, while a
breakdown below $46 can certainly be used by more aggressive
traders.  Our stop is initially in place at $49.

BUY PUT MAR-45 PII-OI OI= 31 at $1.35 SL=0.75
BUY PUT APR-45*PII-PI OI=100 at $2.60 SL=1.25

Average Daily Volume = 457 K



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The Option Investor Newsletter                  Tuesday 03-04-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: Put - XL
Futures Corner: Methodology Made Easy


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

XL - XL Capital - $68.50 (-2.44 for the week)

Company Summary:
XL Capital Ltd, through its operating subsidiaries, is a leading 
provider of insurance and reinsurance coverages and financial 
products to industrial, commercial, and professional service 
firms, insurance companies, and other enterprises on a worldwide 
basis. As of December 31, 2002, XL Capital Ltd had consolidated 
assets of approximately $35.6 billion and consolidated 
shareholders' equity of approximately $6.6 billion. (source: 
company release)

Why We Like It:
The general reason most bulls give for not shorting insurance 
stocks in the ability to raise rates to cover any shortfalls from 
miscalculations in risk or in premiums.  A recent Prudential 
Securities survey indicated that would again be the case heading 
into 2004. So why would we want to take on that risk? Well, XL 
has shown us that the ability to raise its rates has not been 
enough to save it from the ax traders and analysts have recently 
taken to it, culminating with today's failed bounce below 
previously significant support that was broken on Monday. the 
stock has been following the broader markets lower, but also got 
individual attention from Wachovia on Monday. The stock was 
downgraded based on its premium relative valuation and concerns 
over ongoing losses, charges, and reserve strengthening on 
businesses that XL has acquired or invested in.   While raising 
rates may help, it does not appear that the strategy will be 
enough to offset some of the other skeletons in the closet.

The stock has once again rolled over after a failed bounce off of 
$70 took it up to $73.70.  That $70 support level held XL going 
all the way back to late August and early September, with 
numerous successful tests over the past six months.  The level 
was finally breached on Monday and while the break of longtime 
support can sometimes be a bull-trap, it does not appear to be 
the case here. While the stock did attempt a rebound, it found 
resistance at $70, indicating that support has now turned into 
resistance, as is common when it takes a lot of supply to 
overcome demand at a long time significant level. After that 
failed bounce, it headed lower and put yet another box on its 
point and figure chart, which had registered at sell signal at 
$69.  There is some PnF support going back to last August at $67 
and it could be a speed bump on the way down.  However, below 
that level, there is little to prevent the stock from falling as 
low as $59. We like entries from the current level, but after a 
broad market sell-off, we could be in for some type of bounce on 
Wednesday. If the stock were to bounce back over $70, we would 
likely wait for a collapse back below that level to initiate a 
position.  If we head lower, then we like momentum entries on a 
trade back below $68.  Keep in mind the possible support at $67, 
however, when entering on a momentum drop.

BUY PUT MAR-70*XL-ON OI=293 at $3.70 SL=1.85
BUY PUT APR-70 XL-PN OI=90 at $4.90 SL=2.45

Average Daily Volume = 734 K



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

Methodology Made Easy 
By John Seckinger
jseckinger@OptionInvestor.com 

After all the articles on Pivot Analysis, there really are five 
simple steps to become a master of my methodology. 

Let us imagine that this is a trader's first day learning about 
trading futures (or stocks, for that matter).  He/She gets a 
charting system with real-time futures quotes ($80 a month, on 
average), puts the charts on candlesticks instead of bars, sets 
up a futures brokerage account ($5k minimum), makes sure all the 
forms are signed for the current exchanges so risk is clearly 
understood (ONLY use risk capital), and a subscription to OI is 
secured (grin).  Let us further assume no books on trading have 
been read, CNBC is not watched, and that this trader has a good 
hold on his/her emotions up until this point.  Basically, a clean 
slate.

After about one hour of learning simple margin requirements, the 
fact that more volume is better, and the ability to trade totally 
electronically; the E-mini S&P 500 contract is chosen as the 
contract of choice.  Ticker:  ES03H.  After going to www.cme.com 
and finding the proper high, low, and settlement for the ES 
contract, a trader should then start taking some simple notes:  

Contract       Last    Net Change    High        Low       Volume    

ES03H          835.50     -5.50     853.00      832.00    543,998

Ok, now comes step one:  Plug in the numbers above into the 
formula below.  Pull up a daily, weekly (last week), and monthly 
(last month) into this formula as well.  

Pivot point (P) = (H + L + C) / 3 

First resistance level (R1) = (2 * P) - L 

First support level (S1) = (2 * P) - H 

Second resistance level (R2) = P + (R1 - S1) 

Second support level (S2) = P - (R1 - S1) 

Note: H, L, C are the previous day's high, low and close, 
respectively:

Here are the results:  

Daily Levels

Contract         S2         S1       Pivot        R1         R2    

ES03H           819.25     827.25    840.25     848.25     861.25

Weekly Levels

Contract         S2         S1        Pivot        R1         R2    

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    

ES03H          778.00     809.50     836.75     868.25     895.50

Ok, step one of five is done.  But how can a trader use this 
information.  In my opinion, a trader really needs have an idea 
of the psychology of the marketplace.  How is this done?  
Exactly, Bullish Percent.

Going to www.stockcharts.com and plugging in the ticker $BPSPX, a 
trader can get an idea of bullish percent on the underlying cash 
contract:  S&P 500 Index.  An article I did on Bullish Percent is 
found here:  http://www.OptionInvestor.com/futurescorner/fc_020603_1.asp  

Chart of Bullish Percent, SPX ($BPSPX)


 

Without getting a conclusion yet, what else should a trader look 
at before coming up with a bias that a trader can use?  Step 
Three helps to answer this, via some simple Retracements on a 
daily chart.  It is important to outline all the important 
"waves" seen in the last few months.  Just capturing the 'main' 
wave is fine, and this can be done by using the retracement tool 
from the low in October to the high seen in early December (see 
chart below).  

Chart of ES03H, Daily 


 

Step four of five is only making sure to use the correct 
timeframe during trading hours.  I think that, for a beginner, a 
five-minute chart makes the most sense.  Remember, all other time 
frames have been looked at BEFORE the market opened.  Getting the 
right timeframe is important, and it certainly would make a 
difference if most institutional traders looked at a 120-minute 
timeframe than five minute.  In my experience, I have found the 
five-minute chart to be the most helpful for futures trading; 
moreover, all of my institutional trading friends (about 9 firms) 
use the 5-minute chart almost exclusively.

Steps five and six are pretty simple as well.  MACD and 
regression channel analysis during the trading session.  This 
takes the most experience; however, as everything is relative, it 
is pretty easy to pick up and get comfortable with after only a 
few simple 'practice' attempts.  Looking at the chart below, look 
how the ES contract stayed relatively contained within the drawn 
regression channel.  The trick now is to keep these lines intact, 
which would mean looking for bids if the 825 area is cleared 
(read: taking out the top of the drawn channel, and NOT 
constantly re-drawing a regression channel).  Also note how 
prices found resistance at 830.50 as "the probability of 
resistance" was increased as both the top of the regression 
channel, daily retracement area, and MACD all showed the 
potential for bears to enter into the market.  

Chart of ES03H, 5-minute


  

Even after these five steps are completed, a trader still needs 
to be able to "Line Up Levels" when it comes to Thursday's 
session.  With that said, let us do a quick checklist:

Settlement:  835.50; just underneath Both the weekly and monthly 
pivot.  Bearish.

Bullish Percent:  Falling, but risk will start to fall onto 
bearish traders' hands once 30% is cleared.  Bearish, 
intermediate-term basis.

Daily Retracement chart:  ES underneath the 839.50 level, and the 
next area of support is below at 805.25.  Bearish, intermediate-
term basis.

Five-minute chart, MACD, and Regression line:  Downward trending, 
but will have to be watched during the trading session for 
execution purposes.  Nevertheless, Bearish.

Objectives:  The first downside objective would be daily S1 at 
827.25, then Weekly S1 at 822.  The daily S2 level is below the 
Weekly S1 level, but remember that more weight should be placed 
in the longer-term based numbers.  

With the ES contract closing just underneath both the Monthly and 
Weekly pivot, as well as underneath the long-term retracement 
area of 839.50, bears do have a fantastic risk/reward scenario 
heading into Thursday.  A stop?  As noted in the futures wrap, 
Thursday's daily pivot:  840.25, which is ABOVE all of these 
outlined resistance levels.  Note:  The low on Thursday was 821, 
very close to the Weekly S1 level.  In conclusion, following 
these five simple steps should be a very solid start to any 
futures trading looking for a methodology that can be used 
regardless of fundamental news or new trading strategy outlined 
on CNBC by the "guru of the week."  

Ask away,

John Seckinger


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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.

http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN
**************************************************************


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**********

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