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Daily Newsletter, Monday, 04/14/2003

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The Option Investor Newsletter                   Monday 04-14-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Earnings Rush
Futures Wrap: A Proper Start to Option Expiry
Index Trader Wrap: (See Note)
Weekly Fund Wrap: Stocks Finish the Week Lower
Traders Corner: Popular Delusions...


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
04-14-2003                  High    Low     Volume Advance/Decl
DJIA     8351.10 +147.69  8351.94 8201.55   1315 mln  2131/ 694
NASDAQ   1384.95 + 26.10  1386.50 1359.32   1134 mln  1993/1042
S&P 100   449.61 +  8.64   449.63  440.97   totals    4124/1736
S&P 500   885.23 + 16.93   885.26  868.30
RUS 2000  377.61 +  6.31   377.61  371.60
DJ TRANS 2237.71 + 37.15  2231.71 2193.14
VIX        26.47 -  1.80    28.86   26.02
VIXN       39.51 -  0.11    40.24   38.54
Put/Call Ratio 0.79
*******************************************************************

Earnings Rush

Wall Street kicked off Q1 earnings with a rush higher today.  The 
Dow Jones Industrial Average added 147 points or 1.8% to close at 
8351.10.  The NASDAQ Composite fared even better with a 1.92% 
gain of 26 points to close at 1384.95.  The S&P 500 index out-
performed them both with a 1.94% gain of 16.9 points to 885.  It 
really shouldn't be a surprise to witness another big move today.  
The Industrials have been making big moves on Mondays for weeks 
now although this may actually be the first Monday in awhile 
where the focus is on stocks and not war news.

Adding support to American markets were European indices, which 
closed mostly higher.  The London FTSE 100 added 1.08%, the 
France CAC 40 added 1.3% and the German DAX closed +1.57%.  Quite 
the opposite were the Asian exchanges, while mixed, held a more 
negative tone.  The Hong Kong Hang Seng index dropped 1.3% or 112 
points to 8533.  Meanwhile the Japanese NIKKEI lost another 0.8% 
marking its fifth straight day of hitting new 20-year lows.  The 
SARS illness continues to spread and at least one major brokerage 
has lowered their GDP estimates for the region.  Travel in the 
area is coming to a standstill and businesses are being hit hard.  
Some analysts speculate that SARS will send the global economy 
back into recession.

Also moving lower were bonds, which sent yields slightly higher.  
Traditionally one would expect that money coming out of bonds has 
to go somewhere and the logical place is stocks.  The combination 
of cash coming out of bonds and a positive European market 
certainly didn't hurt this morning but traders were undoubtedly 
happy with the war news on Iraq.  Over the weekend all we heard 
about was the non-stop looting, the expectation for a major 
battle in Saddam's hometown of Tikrit and the missing U.S. POWs.  
By Monday morning these were all but conquered.  Looting was on 
the decline as Iraqi police started to work with Coalition forces 
to bring some sense of order back to the streets.  The big battle 
of Tikrit was a no show after days of intense allied bombing took 
the spirit to fight out of the Iraqi resistance.  Intelligence 
reports said that Iraqi soldiers were just putting their weapons 
down and leaving in droves.  Monday's news reports had the U.S. 
forces driving through the middle of Tikrit.  Probably the 
biggest emotional win for the Coalition was the discovery of 
seven U.S. POWs, all in relatively good health.

Fueling the market rally even further were positive earnings 
reports from a number of financial companies.  Leading the charge 
was Citigroup (NYSE:C), Bank of America (NYSE:BAC) and Fannie Mae 
(NYSE:FNM).  Citigroup, a Dow Jones Industrial component, 
reported a rising first-quarter profit of $4.1 billion.  This was 
a record quarter and 18 percent higher than a year ago period.  
Analysts had expected 77 cents and Citigroup trumped it by 2 
cents.  BAC's Q1 profit numbers jumped 11 percent to $2.42 
billion or $1.59 per share.  This surpassed estimates by 11 
cents.  

It is no secret that mortgage rates have been hovering near 40+ 
year lows.  Thus it should be no surprise that Fannie Mae blew 
past earnings estimates.  The U.S. housing market has been hot 
but not as hot as the refinancing frenzy that many had believed 
ran out of steam months ago.  FNM's Q1 net income rose to $1.94 
billion, or $1.93 a share.  This is a sixty percent increase over 
the same period last year.  The company's CEO wisely admitted 
that this pace cannot be kept up and things would eventually slow 
down.  Still, FNM does expect the stronger results to keep 
flowing for the rest of the year.

One third of the S&P 500 is expected to announce earnings this 
week and the reports are coming in fast and furious.  Dominating 
the headlines tonight was IBM's report.  If you've been watching 
CNBC then you probably heard (more than once) about how BIG IBM 
is in the technology field(s).  According to the reporter, out of 
every $10 used in IT spending, $1 goes to IBM.  They have a huge 
presence in a number of diversified industries but they're most 
dominant in IT services, servers and storage.  There seemed to be 
nothing but cheering for IBM prior to the announcement but 
thankfully we saw some actual skepticism about what the numbers 
really mean.  Big Blue is almost famous for "engineering" its 
earnings numbers each quarter through mass purchases of its stock 
to huge layoffs of its workforce.  It appears they found it 
cheaper to lay off workers this quarter, which I believe numbered 
somewhere in the 15,000 range.  Meanwhile the company only bought 
back $65 million worth of stock, which would barely make a dent 
in their results.

The headline number for Big Blue was 79 cents a share compared to 
estimates of 80 cents a share.  However, even though IBM missed 
the net income consensus by a penny, their revenues were stronger 
than expected.  Last year IBM brought in $18 billion the same 
quarter.  This year the estimates were for $19.86 billion and the 
company actually turned in $20.1 billion.  This is pretty 
bullish.  Some industry watchers had suspected that global 
services might be weak with clients pulling back due to the 
conflict in Iraq.  Fortunately, for Big Blue, global services 
rose 24 percent, boosted by their recent acquisition of PWC 
Consulting.  Not so good, one analyst noted, was IBM's gross 
margins on their services actually slipped.  Hardware sales were 
another weak spot for the company where sales actually slowed.  
This may not bode well for the Q1 results of other players like 
Hewlett Packard.  What may surprise some pundits was the 8 
percent rise in IBM's software division, who's sales rose from 
$2.9B to $3.1B.  It will be interesting to hear Microsoft's 
(NASDAQ:MSFT) earnings report tomorrow.

Topping other news note worthies was a new development in the 
Phillip Morris case in Illinois.  Altria Group's (NYSE:MO) 
Phillip Morris' division was hit hard recently when an Illinois 
judge commanded that the company post a $12 billion bond while 
the company appealed his decision in the case.  We've written 
about this case before so I won't go into the details.  However, 
MO basically said that they could not afford to post a $12 
billion bond and in a closed-door negotiation the judge and MO 
met in the middle with a $6 billion bond.  While this is good 
news for the company it's still four times more what they were 
hoping to post during the appeals process.  Shares of MO did move 
higher on the news, further boosting the Industrial's rally 
today.

In what could change the telecom landscape Worldcom Inc. said it 
plans to re-emerge from bankruptcy with a new name, a new CFO and 
one-tenth its former debt load.  I probably don't need to remind 
anyone that Worldcom filed the world's biggest bankruptcy case 
last year in a dramatic accounting scandal that completely 
eclipsed the Enron debacle.  Word has it that the company has 
renegotiated a new plan with 90% of its creditors to come out of 
bankruptcy with only $3.5 to $4.5 billion in debt and a business 
plan that would allow it to be profitable the first year.  Its 
new name will be MCI, the name of its current residential long-
distance division.

Also of note was word that Deutsche Bank "might" lower its full-
year outlook on MMM over concerns in Asia.  DB believes that 
growth may be slowing for MMM in that region and this news is the 
probable cause for the stock's lack of participation in the Dow's 
rally today.  Wall Street expects MMM to announce earnings on 
April 21st with consensus estimates pegged at $1.40 for the 
quarter.  Some of our readers may not know that the Dow Jones 
Industrial average is a dollar weighted average.  Higher dollar 
stocks have a bigger impact on the index's movement.  What 
happens to MMM could have a major affect on the market as a whole 
through its influence on the Industrials.

Speaking of the Industrials, check out the chart below.  Not only 
did the 147 point rally today put the index over Jim's resistance 
level at 8330 but it also close above its simple 200-dma.  This 
is a technical victory for sure but just a few weeks ago an even 
more impressive close over the 200-dma turned into a bull trap.  
Will the rally hold and more importantly can the bulls 
breakthrough the 8520 level?

Chart of the Dow Jones Industrials (120-minute)


 


The NASDAQ Composite also looks encouraging but we can't know if 
Wall Street will suddenly sour overnight on some detail in IBM's 
report or if something negative slips out ahead of Intel's or 
Microsoft's report Tuesday afternoon.  The 1400 and 1425 levels 
are the next hurdles to jump.  

Chart of the NASDAQ Composite (120-minute)


 


Probably the most telling and the most foreboding chart for the 
markets today is the Volatility Index (VIX).  If you did not read 
Jim's wrap on Sunday or Mark Phillip's LEAPs column from the 
weekend, I would encourage you to do so.  Both of them discussed 
the importance of the VIX (again) and how the Fear index appears 
to have set a new operating lower boundary.  The chart below 
shows the previous lows set in the VIX since last November.  
These lows were major tops in the Dow Jones Industrials.  The VIX 
has hit these lows again signaling a top in the market may be at 
hand.  Unfortunately, the signals provided by the VIX are not an 
exact science and the reversal in the markets could be a few days 
off.  Furthermore, there is nothing to prevent the VIX from 
continuing to slide lower, especially if the markets have some 
sort of good news to keep the rally afloat.  Unfortunately, this 
IS earnings season and with the future of the markets resting on 
the guidance that corporate America can give us...well, it only 
takes one high profile blunder to yank the carpet out from under 
the markets.  In Mark's column he did offer his opinion that the 
effective "floor" for the VIX could be between 24.50 and 25.50, 
so it could have a bit farther to fall, which might coincide with 
the $INDU and the COMPX trading to their overhead resistance 
outlined in the charts above.

Chart of the VIX (daily)


 


Headlining the earnings reports tomorrow will be Microsoft 
(MSFT), General Motors (GM), Johnson & Johnson (JNJ), Intel 
(INTC), Bank One (ONE), Motorola (MOT), and Texas Instruments 
(TXN) just to name a few.

The earnings rush is upon us.  Making this week even more 
dangerous to trade is the holidays.  The combination of Passover 
and Easter will keep volume light.  Without volume, any move in 
the stock prices and the major indices could be exaggerated in 
either direction.  Trade carefully and monitor those stops!

James 

P.S. Don't forget that equity options will stop trading on 
Thursday due to the market holiday this Friday.


************
FUTURES WRAP
************

A Proper Start to Option Expiry 
By Vlada Raicevic

Daily Settlement Numbers 4:15pm ET

> DOW
Last: 8351.10
Net: +147.69
High: 8351.94
Low:  8201.55

> YM 03M
Last: 8352
Net: +174
High: 8355
Low:  8157

> S&P 500
Last: 885.23
Net: +16.93
High: 885.26
Low:  868.51

> ES 03M
Last: 886.50
Net: +18.25
High: 886.50
Low:  865.50

> Nas 100
Last: 1048.31
Net: +19.50
High: 1053.50
Low:  1026

> NQ 03M
Last: 1048
Net: +19.50
High: 1053.50
Low:  1026

DAILY PIVOTS

> YM 03M
R2: 8502
R1: 8451
Pivot: 8304
S1: 8253
S2: 8106

> ES 03M
R2: 902
R1: 897
Pivot: 881
S1: 876
S2: 860

> NQ 03M
R2: 1071
R1: 1062
Pivot: 1044
S1: 1034
S2: 1016

The excitement in the air was palpable as we opened another 
options expiry week, with nervous expectations and much knuckle 
chewing, the market was about to digest numbers from many of Wall 
Street's biggest names.  A small gap up was bought a little, sold 
a little, bought a little, sold a little.....for two hours we 
chopped around.  Then, with no warning, the futures exploded up on 
big volume pushing well above the morning range.  This initial 
volume had a little follow through, but even as volume receded 
price hit a high of 880.25 before selling a little on low volume.  
Another push up, on even lower volume, took the ES to 882 where it 
sold off again to the same 878.50 as before, and then it churned 
between 878 and 881 for most of the afternoon until a mild 
increase in volume, seemingly all buyers, pushed the ES up to 
close at the highs of the day at 886.50.

The ES is now back above both the 50ema and the 200ema on all time 
frames except for the daily chart.  The 60 minute chart has both 
of those moving averages developing a nice uptrend as price 
approaches the most recent highs:  888.75 on 4/3, 888 on 4/8, 
887.25 on 4/9.  Beyond that is the 895.25 high on 3/21 and 905 on 
4/7.

The ES Daily chart is looking better, and Macd has crossed back 
up, fast stochastics is about to cross back up, and RSI is on the 
verge.  Stochastics is holding the centerline but without any 
confirming bullish crosses.  ADX continues to be somewhat 
puzzling, showing that D- is still moving down, and D+ also moving 
down slightly.  OBV is not showing any divergences, and thus does 
not give us any hints either.  Today's move was on low volume, but 
it nevertheless broke above recent highs on sustained end of day 
buying.  If you recall, many times these past weeks there was 
sustained buying at the end of the day only to gap down the next 
morning due to overnight news.  We cannot speculate as to what may 
happen overnight, but earnings from IBM tonight confirmed 
guidance, so that particular event doesn't look like it will 
effect the futures negatively.  

The ES 270 minute chart shows how price has been unable to close 
above that red uptrend line that it broke below on 4/9, having 
formed a new uptrend line (black), this mornings selling stopped 
and then bounced off that new line to first find resistance at the 
downtrend line from the 1/13 high, and then to pierce and close 
above that line.  In fact, you can see how the close was above 
that blue box range.  This is bullish even if it is on the 
shoulders of low volume.

ES 270 Minute Chart 1:


 

Still looking at the 270 minute chart, we can see the Macd has 
crossed back up and above the centerline, and is looking to cross 
over the downtrend line if we see another green candle.  RSI has 
also moved above its moving average, and the fast stochastic is 
coming out of the oversold area and moving up nicely as the medium 
speed (green) stops its decline and starts to slowly curl up.  ADX 
is still definitely bullish.  So in addition to price movement, 
the indicators are pointing up as well.

ES 270 Minute Chart 2:


 

The ES 60 minute chart is in a strong bullish uptrend, with 
stochastics, RSI and Macd all looking very strong.  The nettle in 
the soup is that price has reached the upper line of the 
regression channel, and while it could pierce above it, it will 
not be able to hold that level for long as price will have to pull 
back to allow the channel to be redrawn bar by bar so it catches 
up with the bullishness.  The fastest stochastic is starting to 
enter the overbought area, but it still has a ways to go before it 
reaches that area and rolls over; the same is true for RSI, which 
is at 73, not far off the recent highs of 78 reached on the large 
gaps up we have seen.  So, this chart tells us that we could see 
another 1-2 hours of mild or 1 hour of strong buying before price 
needs to roll over or consolidate sideways to relieve this 
afternoon's buying pressure.

ES 60 Minute Chart:


 

The NQ daily chart is not nearly as bullish as the ES.  There are 
no crossovers on the Macd or RSI, even the fast stochastic is 
still uncrossed, and never reached anything resembling oversold.  
ADX shows selling pressure continues to fade, but so does 
buying....looking like there is little interest from both sides.  
OBV moved up today, but could not move above the recent lower top 
it made on Friday's push upward.  Price did hold the secondary 
uptrend line, but failed to pierce (or even approach) the line 
that it broke below last Wednesday, unlike the ES which moved back 
above that line today.

NQ Daily Chart:


 
 
Looking at the NQ 270 minute chart, we see that it did move above 
the downtrend line from the recent highs, and that there are 
bullish crossovers on many of the indicators.  These crossings are 
not nearly as strong as on the ES, but nevertheless, they cannot 
be argued with.  Weak crossings of centerlines and trendlines can 
be viewed with a little bit of suspicion, but until proven 
otherwise, we'll consider it a bullish view.  Also note that price 
was repelled by the centerline of the 200 period regression 
channel (black), and that additional resistance is at the 1066 
area, centerline of the 78 period regression channel (blue).

NQ 270 Minute Chart:


 

The NQ 60 minute chart is much like the ES, with price hitting the 
upper regression channel and pulling back, with many indicators in 
a fairly strong uptrend; however, unlike the ES, the indicators 
are not nearly as close to overbought as on the ES chart.

Just a note on the YM chart: while the YM and ES have been fairly 
faithful in staying within spitting distance of each other, the YM 
is beginning to look a little bit stronger than the ES.  I'll have 
to keep an eye on it to see if any real divergences start showing 
up.  For the time being, the real discord has been between the NQ 
and the ES/YM for that past few weeks.

I also wanted to show a couple of daily charts with the 7ema (red) 
and the 15ema (black) moving averages.  Note how their crossovers 
tend to give a fairly good indication of trend change.  Since the 
bullish crossover on 3/17, those moving averages have stayed 
positive, and have remained above the 50ema (purple) after 
crossing it.  They are currently staying divergent and after today 
are once again pointing up.    

ES Moving Averages Chart:  


  

The NQ chart shows that the 7ema crossed below the 15ema on 4/9 
and they have yet to cross back up, although like the ES, both of 
those moving averages have turned back up after today's bullish 
day.  Also note that the NQ's were stopped in their tracks at the 
200ema (yellow) which sits at 1055.

NQ Moving Averages Chart:


 


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Check the Site Later Tonight For Jeff’s Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_041403_1.asp


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****************
WEEKLY FUND WRAP
****************

Stocks Finish the Week Lower

U.S. stocks were lower for the week ended April 11, 2003 as wary 
investors digested economic reports and the latest developments 
in the war with Iraq.  Friday's retail sales figure was stronger 
than expected, but an economic report during the week indicating 
a war-related, weather-related rise in energy prices pushed many 
investors back to the sidelines.  For the week, the S&P 500 fell 
1.2% to close the week at 868.




 

According to Lipper, all U.S. equity fund categories were lower 
on the week.  The average foreign stock fund, on the other hand, 
rose by 0.2% in dollar terms, matching the weekly return of the 
MSCI EAFE index.  European stocks were higher while the Japanese 
stock market neared a 20-year low, pulling down the MSCI Pacific 
stock index.  Gold prices rose during the week.

The Lehman Brothers Aggregate Bond index was basically flat for 
the week with short/intermediate-term bond prices down slightly 
and long-term bonds up marginally.  While investment-grade bond 
prices sputtered, higher-yielding sectors such as foreign bonds 
and U.S. high yield ended the week higher.  Global fixed income 
funds were the highest performers for the week, rising 0.25% on 
average per Lipper.

The average 7-day simple yield of all taxable money market funds 
slid 2 basis points last week, to 0.72%, according to the latest 
report from iMoneyNet.com.

U.S. Equity Fund Group

 Week   YTD
-1.1%  -0.8%  Vanguard 500 Index Fund (VFINX) 
-1.1%  -3.8%  Vanguard MidCap Index Fund (VIMSX)
-0.5%  -2.7%  Vanguard SmallCap Index Fund (NAESX)
-1.0%  -0.9%  Vanguard Total Stock Market Index Fund (VTSMX)
-1.0%  -0.9%  Lipper Large-Cap Core Equity Fund Average 
-0.8%  -2.8%  Lipper Mid-Cap Core Equity Fund Average 
-0.5%  -4.0%  Lipper Small-Cap Core Equity Fund Average
-1.0%  -1.2%  Lipper Multi-Cap Core Equity Fund Average
-2.0%  +0.5%  Lipper Science & Technology Fund Average


With tech stocks lower, growth-oriented stock funds were a little 
harder hit last week than value-oriented funds.  For example, the 
$14 billion Fidelity Growth Company Fund declined 2.3%, while the 
Smith Barney Aggressive Growth Fund produced a negative return of 
3.2% for the week.  Sequoia Fund, a large-cap value fund that had 
over 75% of assets invested in financial services stocks recently 
gained 0.8% for the week, bucking the negative trend.  As bucking 
the negative trend was Longleaf Partners Small Cap Value Fund, up 
1.3% for the week.

Health care stocks were also down as evidenced by the 3.0% weekly 
loss by the $13 billion Vanguard Healthcare Fund.  Biotech stocks 
were perhaps the hardest hit of all last week.  Fidelity's Select 
Biotechnology Portfolio shed about 5% of its value over the 5-day 
period, indicative of conditions in that market sector.  Fidelity 
Select Energy Service Portfolio rose 2.6% on the week to lead the 
energy group higher.

International Equity Fund Group

 Week   YTD
+0.2%  -4.7%  Vanguard Developed Markets Index Fund (VDMIX)
+1.6%  -0.5%  Vanguard Emerging Markets Index Fund (VEIEX)
+0.3%  -4.4%  Vanguard Total International Stock Index (VGTSX)
+0.2%  -5.6%  Lipper International Fund Average
+1.7%  -1.1%  Lipper Emerging Markets Fund Average
+3.5%  -12.5%  Lipper Gold Fund Average


Gold mutual funds gained 3.5% on average per Lipper as did the 
category's largest fund based on assets - Fidelity Select Gold.

With European stocks higher and Pacific stocks lower last week, 
diversified international stock fund returns were all over the 
place.  Liberty Acorn International Fund, for example, was 2.1% 
higher for the week while Oppenheimer Global Fund sank in value 
by 1.4%.  

Funds specializing in the developing/emerging markets generally 
performed better as a whole than developed-market equity funds.   
GMO's Emerging Market III Fund rose 1.7% for the week while the 
group's other billion-dollar fund, Templeton Developing Markets 
Fund returned 1.8%.

U.S. Fixed Income Fund Group

 Week   YTD
-0.1%  +0.9%  Vanguard Short-Term Bond Index Fund (VBISX)
-0.1%  +1.4%  Vanguard Intermediate-Term Bond Index Fund (VBIIX)
+0.2%  +1.1%  Vanguard Long-Term Bond Index Fund (VBLTX)
+0.0%  +1.0%  Vanguard Total Bond Market Index Fund (VBMFX) 
-0.1%  +0.8%  Lipper Short Investment-Grade Fund Average
-0.1%  +1.6%  Lipper Intermediate Investment-Grade Fund Average
-0.0%  +0.4%  Lipper U.S. Government Fund Average 
-0.0%  +1.3%  Lipper Corporate A-Rated Debt Fund Average
+0.2%  +7.8%  Lipper High-Yield Fund Average


It was a pretty ho-hum week for the fixed income markets as bond 
investors digested the week's economic reports.  During the week, 
economic reports showed a rise in energy prices at the wholesale 
level in March, along with a rise in retail sales.  Both reports 
were not necessarily good news for fixed income securities.  For 
the week, the total U.S. (investment-grade) bond market was flat.

High-yield bond funds remain the place to be in the fixed income 
group, gaining 0.2% on average last week, and now 7.8% higher on 
average since December 31, 2003.  Credit conditions are gradually 
improving this year, following last year's corporate credit woes.  
The $3 billion Fidelity Capital & Income Fund rose 0.2% last week 
to match the category average.

International Fixed Income Fund Group

 Week   YTD
+0.3%  +2.7%  Lipper Global Income Fund Average
+0.2%  +2.1%  Lipper International Income Fund Average


Global/international bond funds remain another source of higher 
yields and total returns in 2003, rising 0.2%-0.3% for the week, 
per Lipper.  Leading that group higher was Alliance's Bernstein 
Americas Government Income Fund, which returned 0.9% last week.  
T. Rowe Price International Bond Fund gained 0.3% for the week.    

Balanced Fund Group

 Week   YTD
-0.6%  -0.1%  Vanguard Balanced Index Fund (VBALX)
-0.6%  -0.5%  Lipper Balanced Fund Average


With U.S. financial markets sliding last week, the average U.S. 
balanced fund lost 0.6% of its value for the week.  Laggards on 
the week included the $6 billion Vanguard Asset Allocation Fund, 
down 1.2% and Oppenheimer Quest Global Balanced Value Fund, off 
1.5% for the week.  The group's largest fund by assets, American 
Funds' Income Fund of America, held up better than most balanced 
funds.  It lost just 0.1% for the week.  

Money Market Fund Group

Yield
0.98%  Vanguard Prime Money Market Fund (VMMXX)
0.72%  iMoneyNet.com All Taxable Money Market Fund Average


The $50 billion Vanguard Prime MMF (Retail Class) saw its 7-day 
simple yield slip below 1.00% to 0.98%.  Less than a dozen fund 
offerings at the retail level are above 1.00% any more.  The top 
yielding retail money fund remains the PayPal Money Market Fund 
(402-935-7733) at 1.24%, per iMoneyNet.com.   

Mutual Fund News

The Dreyfus Funds and the Houston-based AIM Funds are two of the 
fund families in the news last week.  According to Morningstar's 
weekly Fund Times report, Dreyfus announced it will merge a weak 
tech fund sibling into a "more promising" offering in the group.  
Dreyfus Premier NexTech (DPNAX), with just $44 million in assets 
today, will be merged into the $544 million Dreyfus Premier Tech 
Growth Fund (DTGRX) at the end of September, pending shareholder 
approval.  Dreyfus said it also plans to liquidate Dreyfus Small 
Cap Opportunity (DSCOX) on or around May 16, 2003.  The fund was 
closed to new investors last week, per Morningstar.

The AIM Funds said it would merge $83 million AIM High Yield II 
(AHAYX) with its more established sibling, the $1.08 billion AIM 
High Yield Fund (AMHYX), pending shareholder approval.  

Bessemer Trust Company, who manages the Brundage, Story & Rose 
mutual funds, said it plans to merge a couple of its offerings.  
It will combine $24 million Brundage, Story & Rose Equity Fund 
(BREQX) into $497 million Westbury Capital Opportunities Fund 
(OWGOX).  Brundage, Story & Rose Short/Intermediate Term Fixed 
Income Fund (BRSFX) will be merged into the Old Westbury Fixed 
Income (OWFIX).  Those changes will take place around June 6th, 
pending shareholder approval, according to Morningstar.

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

Steve Wagner
Editor, Mutual Investor 
steve@mutualinvestor.com


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

Popular Delusions...
by Mark Phillips
mphillips@OptionInvestor.com

Those of you that are a fan of market history have probably at 
some time read Charles Mackay's book, "Extraordinary Popular 
Delusions & the Madness of Crowds".  If you've never read the 
book and have been trading in the market for the past few years, 
I believe you are doing the equivalent of going into battle 
naked.  Just read this single snippet from the Preface to the 
book and tell me if it isn't an apt description of what has been 
taken for reality in the market for years now.

"We find that whole communities suddenly fix their minds upon one 
object, and go mad in its pursuit; that millions of people become 
simultaneously impressed with one delusion, and run after it, 
till their attention is caught by some new folly more captivating 
than the first."  Can you say NASDAQ 5000?  The psychological 
aberration that allowed investors to run amok in 1999-2000 is not 
an isolated occurrence.

Don't believe me?  How about the market swoon from early January 
to early March?  Rampant fear of what would occur when we invaded 
Iraq pushed buyers to the sidelines.  Then as though a fog had 
lifted on March 12th, investors couldn't click the "Buy" button 
fast enough, driving the market sharply higher.  The war hadn't 
even started yet, but seemingly the whole 'crowd' had bought in 
on the notion that it was going to be a replay of 1991.  The 
coalition was going to go in, make quick work of the grossly 
over-matched Iraqi forces, and the veil of uncertainty would be 
lifted.  Suddenly, the economy would be healed and the bull 
market would be back.

Call me a pessimist, but I never quite saw the logic in this 
argument.  The only similarity between 1991 and 2003 was the fact 
that we were launching an offensive military campaign against 
Iraq in the midst of a weak economic climate.  The differences 
are far more numerous than the similarities, but that didn't slow 
the stampede.  "Don't bother me with record trade imbalances, a 
looming debt bubble, a stagnant economy and still-lofty equity 
valuations.  A new bull market is being launched and I can't 
afford to miss it."  At least that appears to be the thinking in 
Joe and Jane Average Investor's mind.  Don't misunderstand me.  
I'm not bitter or upset at the market for rallying.  It is doing 
its job, pulling in the next round of sheep to be fleeced.  The 
Great Humiliator strikes again.

You see, the completion of the primary war effort didn't launch a 
new wave of prosperity.  On March 20th (the day Operation Iraqi 
Freedom was launched), the S&P 500 (SPX.X) closed at 875.  Today, 
the SPX opened a few points below that level and actually managed 
to move 10 points above there by the closing bell.  Color me 
unimpressed.  We can make an argument that buyers were waiting 
for the impressive numbers expected from the start of earnings 
season.  

Well, IBM kicked off that parade tonight and unless you had 
already been drinking pretty heavily by the time the report came 
out, it was pretty hard to get excited by what the company had to 
say.  To be sure it wasn't a bomb shell, but neither was there 
anything to give credence to the hoped for 2nd half economic 
recovery.  You see, this is the new mania that we have to deal 
with in the weeks ahead.  The so-called financial experts and 
economists are already singing their siren song of "Earnings may 
be subdued this quarter due to the Iraq conflict, but a powerful 
2nd-half economic recovery will launch the next great bull market 
later this year.  Don't miss out!"  I expect to hear the first 
part of that mantra repeated by CEOs and CFOs in the weeks ahead, 
that "Iraq ate my earnings" (Credit to Jim Brown).  It is the 
other part of the mantra that I expect will be lacking.  I will 
be VERY surprised to hear more than a handful of corporate 
executives trumpet how wonderful things will be by the end of the 
year due to the 2nd-half recovery.  The reason why is that they 
don't see it.

Here's the details of the IBM earnings release as I interpret it.  
The company missed estimates by a penny, even though revenues 
came in slightly ABOVE consensus.  Hmmm, that sounds like 
declining operating margins to me.  One comment I liked from the 
call was that one cause of the earnings shortfall had to do with 
income from retirement plans.  Remember our discussions in the 
past, pointing out the fallacy of the way pension plans show up 
in the earnings stream?  First off, I really question that a 
company should be able to use gains on its pension plan to 'pad' 
the bottom line.  But more importantly, the retirement income 
portion of the income statement is based on an ASSUMED rate of 
return (the average right now seems to be running in the 8-10% 
range), not actual returns.  Do you think that sort of return is 
reasonable for large managed equity/bond portfolios in the 
current market environment?  Neither do I, and facing that 
reality is part of what IBM is claiming is impacting their 
earnings.  This is the problem with non-core business items being 
used in the calculation of financial results -- it obscures 
reality.  Correct me if I'm wrong, but I can't think of many 
instances when you need to obscure reality, except when it is to 
hide/camouflage/mitigate bad news.  If you've got better news 
than expected, then you'll shout it from the highest peak you can 
find.

There's another aspect to the company's conference call that 
leaves me with a bad taste in my mouth, and it is the 
reaffirmation of full-year guidance.  IBM just reported 
$0.79/share for Q1 and reaffirmed full year guidance of $4.32 per 
share.  Do some quick math, and that means Big Blue needs to turn 
in $3.53/share over the next 3 reporting periods, for an average 
of $1.18/quarter.  Let's just say I'm skeptical, as the company 
was only able to top that figure for one of the past 5 quarters.  
The only way the company is going to meet those consensus 
estimates is for the fabled second-half economic recovery to 
appear.  What else showed up in the call that we can use to 
evaluate the likelihood of a recovery.  The company had a drop in 
IP revenues, saw a 5% drop in PC sales, but has a 'strong' 
pipeline of Q2 activity.  But (there's always a 'but'), IBM 
declined to reaffirm consensus estimates for Q2, but cautioned 
that analysts 'should not read too much into this'.  No, of 
course not, because then they would be asking the hard questions 
like "If the company can't make the Q2 numbers, that's going to 
turn the heat up for the second half.  Is IBM banking on a 
second-half recovery to meet their numbers?"  The answer is yes, 
but I doubt anyone in upper management wants to be put on the 
spot for that question.

It isn't my intention to pick on IBM.  I don't think they are any 
worse/better than several dozen other prominent companies that 
are due to report earnings over the next couple weeks.  They are 
just the first out of the gate, and therefore first to find their 
way into my sights.  Hopefully you can see from my discussion 
above, that everything in this earnings season is going to be 
about the forward guidance.  The reason why is that Wall Street 
is counting on the idea of a second-half recovery.  Due to the 
just-won Iraq war, many companies may be able to forgo the hard 
questions until next quarter, but the simple truth is that there 
is no evidence of a pending recovery in the second half of the 
year.  Could it happen?  Certainly!  But investing based on that 
premise (with the evidence currently in hand) seems like little 
more than a coin toss.  That's not how I invest my hard-earned 
dollars!

You see, we've been given the line of garbage (I'm being kind!) 
about the second half recovery for the past 3 years.  Do we have 
any reason to believe it this time?  It reminds me of the story 
of the little boy who cried wolf.  By the time there actually was 
a wolf, nobody believed him.  Apply that story to the market and 
there are obviously too many people that still believe the 
recovery story.  And to me, that means it is still a long ways 
off.  The lesson here is that we need to trust what we can see 
and understand (chart patterns and actual fundamental and 
economic developments).  Pursue any other course and we are 
leaning on the "wisdom" of some other self-proclaimed guru and 
buying into the popular delusion of the month.  That's not a 
recipe for profits.  It's more likely a guaranteed way to get 
fleeced.

Be your own guru and don't follow the crowd!

Mark


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The Option Investor Newsletter                   Monday 04-14-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: None
Dropped Calls: None
Dropped Puts: None
Play of the Day: Call - BBBY
Market Watch: Four-Lettered Stocks


Updated on the site tonight:
Market Posture: No Monday Blues


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DROPPED CALLS
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*********************
PLAY OF THE DAY - PUT
*********************

Bed Bath & Beyond - BBBY cls: 38.55 change: +1.09 stop: 36.00*new*

Company Summary:
Bed Bath & Beyond is an operator of stores selling predominantly 
better quality domestics merchandise and home furnishings 
typically found in better department stores.  As of May, 2002, the 
company had stores in 44 states.  Domestics merchandise includes 
bed linens and related items, bath items and kitchen textiles.  
Home Furnishings include kitchen and tabletop items, fine tabletop 
and giftware, basic housewares and general home furnishings.

Why We Like It:
Even with the strong Retail numbers last week, the Retail index 
(RLX.X) just can't break out of its funk.  Oh it is certainly 
giving it a good college try, but that $290 resistance level 
stopped the bulls cold again on Friday.  This lack of bullish 
conviction is reflected clearly in our BBBY play.  Despite the 
fact that the stock is trading near its all-time highs and showing 
excellent strength relative to the RLX, it is perhaps telling that 
the stock was unable to breach our $38 trigger on Friday, topping 
out intraday at $37.97.  That isn't to say that it won't get the 
job done (we think it will), but it continues to keep us cautious 
on the play, especially with the potential for bearish divergence 
on the Stochastics oscillator (see chart below).  On the more 
positive side, we can take note of the way the converged 10-dma 
($36.15) and 20-dma ($36.00) are rapidly rising towards what looks 
like strong support in the $36.25-36.50 area.  Despite the bearish 
tone on Friday, that had the RLX closing in the red, BBBY managed 
to hold onto positive territory after hitting a new all-time 
intraday high.  We want to continue to exercise patience on BBBY 
because of that potential bearish divergence mentioned above, and 
that means not making the play active until it can show us the 
strength needed to trade $38.  Aggressive traders will want to 
enter on the initial breakout, while those with a more 
conservative style will want to wait for a subsequent pullback to 
confirm support in the $37-38 area after the initial breakout.

Why This is our Play of the Day
The broad market may have had a hard time making up its mind this 
today, but once it got moving just before the lunch hour, that was 
enough to give BBBY the boost it needed.  The stock plowed through 
the $38 level, providing a nice entry for momentum types.  And for 
those who wanted a pullback before entry, they got their wish too. 
BBBY pulled back right to the $38 level before rebounding from 
newfound support to close very near its high of the day on strong 
volume, to boot.  With the breakout to new all-time highs, the 
play is looking pretty strong, and the best setup for new entries 
will now be on a pullback and bounce from the $37-38 area.  Look 
for very strong support to now appear in the $36.50 area, which is 
the site of both the ascending trendline and the rising 10-dma.  
We're raising our stop tonight to $36.

Suggested Options:
Shorter Term: The May 37 Call will offer short-term traders the 
best return on an immediate move, with manageable risk.  With 
April expiration looming next week, only the most aggressive 
traders should consider using the listed April option.

Longer Term: Traders looking to capitalize on a sustained breakout 
move over the next few weeks will want to look to the May 40 Call 
or even the July 40 Call.  These options are currently out of the 
money, but should provide sufficient time for the stock to move 
higher without time decay becoming a dominant factor over the 
short run.

BUY CALL APR-37 BHQ-DU OI=1803 at $1.35 SL=0.75
BUY CALL MAY-37 BHQ-EU OI=5455 at $2.50 SL=1.25
BUY CALL MAY-40 BHQ-EH OI=2409 at $1.15 SL=0.50
BUY CALL AUG-40 BHQ-HH OI=3323 at $2.70 SL=1.25

Annotated Chart of BBBY:
http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-14/BBBY041403.gif

 

Picked on April 8th at  $37.18
Change since picked:     +1.37
Earnings Date          07/02/03 (unconfirmed)
Average Daily Volume = 3.29 mln


************
MARKET WATCH
************

Four-Lettered Stocks

Apollo Group - APOL - close: 53.04 change: +1.52

We're going to lead off Monday's watch list with a stock that's 
been on fire (YTD).  The stock may not move too fast but it's 
been a consistent climber.  If you're not familiar with Apollo 
you might know them by another name, University of Phoenix.  They 
target adults seeking to further their education.  Enrollment was 
up 31% last year and sales jumped 33% their last quarter.  It 
looks like the next earnings report out for APOL is in June.  
Meanwhile the stock has been consolidating sideways the last 
couple of weeks and just broke out of a pennant pattern today.  
The weekly chart is very overbought but the darn stock just won't 
stop (famous last words, right?).  One could use a very tight 
stop given the pattern on the daily chart.  If this fits your 
trade profile then the August or November options may be your 
best bet.

Chart=


---

Fastenal Co. - FAST - close: 34.35 change: +1.35

FAST may have put in a bottom this March.  The stock bounced 
twice at $28.00 and survived an earnings announcement last 
Friday.  The reaction today was positive and shares are now above 
potential resistance at $34 and the stocks 200-dma.  The ramp up 
in the daily chart looks a bit steep but aggressive traders might 
be able to squeeze another few points out of it before it runs 
into resistance.

Chart=


---

Intuit - INTU - close: 40.08 change: +0.85

Has tax time got the investing public thinking about the makers 
of Quicken and TurboTax?  If so they'll be turning to INTU as the 
creator.  Last month the company cut its 2003 earnings and 
revenue numbers and the markets hammered it for a major loss.  
Since then the consolidation has been sideways and the recent 
action almost looks bullish.  Should the stock make a confident 
move above $40 it might spark some short covering.  Aggressive 
traders might want to try for $45.00 on a partial fill the gap 
move.

Chart=


---

Adobe Systems - ADBE - close: 33.51 change: +1.14

ADBE appears to be one software stock that it out-performing its 
peers.  The 3.5% rally today was encouraging even though the 
company said the SARS virus might affect production in its 
Singapore operations.  Thus far, the outbreak hasn't been an 
issue, but the company pre-warned that it could have an affect.  
The market doesn't appear to care and the bullish pattern remains 
intact.  A move above $34 might be a trigger point to go long.

Chart=


---


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

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


**************
MARKET POSTURE
**************

No Monday Blues

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/mp_041403.asp


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