Option Investor

Daily Newsletter, Tuesday, 05/06/2003

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The Option Investor Newsletter                 Tuesday 05-06-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Risk of Weakness
Futures Markets: New high
Index Trader Wrap: (See Note)
Market Sentiment: A Brief Note
Weekly Fund Screen: Highest 4-Week Performers

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      05-06-2003           High     Low     Volume Advance/Decline
DJIA     8588.36 + 56.80  8641.22  8525.75 2.03 bln   2167/1056
NASDAQ   1523.71 + 19.70  1531.82  1503.31 2.10 bln   1947/1348
S&P 100   472.71 +  3.42   475.66   469.07   Totals   4114/2404
S&P 500   934.39 +  7.84   939.61   926.38
W5000    8888.97 + 71.50  8931.73  8815.85
RUS 2000  412.75 +  2.95   413.79   409.81
DJ TRANS 2486.35 + 12.80  2492.45  2471.02
VIX        23.26 +  0.02    23.81    22.47
VXN        32.13 +  0.44    32.71    31.30
Total Volume 4,386M
Total UpVol  3,254M
Total DnVol  1,059M
52wk Highs  575
52wk Lows    34
TRIN       0.74
PUT/CALL   0.91

Risk of Weakness

You could not tell it from the markets but the Fed is worried
about the future. Traders appear unconcerned as all but the
Dow traded to new highs for the year. Considering this was a
Fed meeting day this was no small feat.

Chain Store Sales rose again last week with a +2.1% gain. This
indicator has been very volatile lately and the gain erases
the -1.6% loss the prior week. Analysts suspect advance sales
for Mother's Day are providing the lift. (obviously not male
buyers since there is still four shopping days left) According
to analysts there is little pent up demand and no must buy
items to attract consumers. Rising unemployment could also
continue to put pressure on retailers.

The biggest event for the day was of course the Fed meeting.
The Fed decided to leave rates unchanged but confused everyone
with their guidance. They said recent economic reports had been
disappointing but they mostly reflected prewar conditions. Since
the war was over oil prices have fallen, consumer confidence has
risen along with the debt and equity markets. The Fed felt these
conditions along with the two years of prior rate cuts were
enough to foster an improving economic climate over time. Great!
Or at least that is what it appeared on the surface.

The second paragraph began with "the timing and extent of that
improvement remain uncertain." This set the markets on edge and
caused an immediate slump. Hidden in the middle of the second
paragraph and in Greenspeak code was even worse news. "the
probability of an unwelcome substantial fall in inflation,
(code phrase for deflation) though minor, exceeds that of a
pickup in inflation from its already low level. The Committee
believes that, taken together, the balance of risks to achieving
its goals is weighted toward weakness over the foreseeable
future." In English, the Fed thinks there is a greater risk of
deflation than inflation and they think the risk has increased
for the economy to slow.

Great news if you believed the markets, which bounced to a
Dow high of 8641 after the announcement was fully released.
The Dow was up +110 after the Fed said the risk to the economy
was stronger and were so afraid of the "D" word they would not
even say it in the report. Eventually some concern filtered
through and it sold off to zero before bargain hunters jumped
into the fray. It was a very confusing afternoon. The Fed has
been saying the outlook is picking up and the soft spot was
firming for months if only the Iraq war was not cluttering up
the geopolitical landscape. Ok, the war is over and now they
are worried despite oil, confidence and a rising market. Just
call me cynical but I think the rope a dope they are trying
to pull on investors is about to tire.

They have set the stage to cut rates at the June meeting despite
the falling dollar at four year lows. They would not do this if
there were any other chance of success. The markets are showing
the first real excitement in years and they are afraid to tank
it by being truthful. I don't blame them but come on, "unwelcome
substantial fall in inflation"? That puts an entirely new spin
on Greenspeak. We can't use the "D" word the markets will tank.
I guess the average investor probably does not actually
understand the guidance anyway and this code phrase will just
confuse those that do. Bottom line, the Fed is worried. They
are in a box like Japan and very few weapons left in their
monetary arsenal. They are hoping the economy will magically
rise and save their butt just like we hope a bad optiontrade will
magically reverse and turn profitable before the bid disappears
completely. The three months of decreasing job losses has them
hooked on hope. Hope that the trend is improving. Hope that the
bearish flag on the Jobs chart will break to the upside instead
of complete the bearish pattern with another drop. We have all
been there and done that with our own money but I think the Fed
is betting the economy on this because they have no other choice
not because they want to. Here is the link to the complete release:

After the Fed excitement this afternoon the attention shifted to
Cisco earnings. They beat the street by a penny and Chambers
applied the spin. He said they were more optimistic about areas
they had control. That means they feel they can cut costs again
to make earnings if they have to. Obviously they have no control
over demand and revenue other than giving the products away at
fire sale prices. They said gross margins would be in the 68-70%
range for the current quarter so they are not giving it away yet.
Chambers said it remained a challenging environment and customers
were remaining cautious. He said earnings would be flat for the
current quarter on a possible minor increase in revenue. His
outlook remained cloudy and he said he would not be surprised
with an increase or a decrease in IT spending. To recap they
beat the street by continuing to cut costs on revenue that was
inline with estimates. CSCO fell slightly in after hours.

On the other side of the ledger ERTS blew away estimates and
raised guidance substantially. ERTS posted 40 cents compared
to estimates of 34 cents. They raised estimates for the full
year to $3.10-$3.25 from the consensus of $2.96 a share. The
company said they would have a breakeven quarter compared to
an expected loss of -4 cents. The company said it was reducing
console prices but expected to hold the line on prices on its
major game titles. This company is doing well despite the
economic dip and upstaged Cisco in the guidance department.

As earnings draw to a close the analysts and stock pumpers
continue to point to the average earnings gain of the S&P of
+13.2% for the 1Q as evidence the economy is doing well. They
are predicting stronger gains going forward based on percentage
increases of the 1Q numbers. There is a massive flaw here but
it is not likely the bulls will care. The flaw is the massive
ONE TIME gains by the oil companies due to the ramp up in oil
prices prior to the war. Chevron posted a +131% jump in earnings,
XOM +129%, AHC +64% and RD +98%. (RD is not in the S&P but
used as an additional example) The oil companies have said
the gains will not be repeatable and were a result of the war.
If you take the energy gains out of the S&P the average gains
for the 1Q drop to only +6.1% If the current rally was justified
on the average S&P gain of 13.2% for the 1Q and extrapolations
for the rest of the year, is it justified using 6.1% as the
initial number? The current S&P profit estimates for future
quarters based on a +13.2% Q1 are +13% Q2, +19% Q3, +22% Q4.
If you consider 58% of the S&P has already warned for Q2 does
that give you cause for concern?

It appeared to me that nobody was concerned about anything
today. The Dow powered to 8641 and well over the 8600 resistance
despite the FOMC meeting. It fell back at the close to just
under this level but the uptrend is clearly in place. The
Dow is facing even stronger resistance at 8700 and again 8800
but nobody appears worried. The NYSE posted a very strong 244
new 52-week highs to only 6 new lows on volume of 2B. Definitely
some conviction finally beginning to show.

Dow Chart - daily

The Nasdaq was even more impressive. With CSCO earnings looming
over the tech sector the index soared to a new eleven month
high at 1531 and held most of its gains. The good news from
companies like ERTS is continuing to power tech investors and
they are coming off the sidelines in droves. The Nasdaq traded
2.106 billion shares, a record for the year, with 3:1 up volume
to down. New highs hit 228 compared to only 17 new lows. Above
1521 there is very little clearly defined resistance before the
1800-2000 level. I seriously doubt we are going anywhere near
there any time soon but anything is possible. There is token
resistance along the way but nothing as serious as that recently

Nasdaq Chart - Daily

It all boils down to where do we go from here? The Fed is worried
about the "D" word and hoping that the three months of job losses
was a war related event. The Challenger Layoff report for April,
which was announced on Monday jumped +71% over March levels with
-146,399 reported. The Challenger report covers ANNOUNCEMENTS of
layoffs and those layoffs are normally done over the following
60-90 days. That makes it a leading indicator of future trends.
The continued rise in Jobless Claims, which has been over 400K
for the last 11 weeks is also a current indicator. The average
for the last three weeks after the war was -452,000 jobs. This
continues to paint a serious bearish divergence to the current
market action. The markets are on a roll and fundamentals do
not matter. If the reaction after today's Fed meeting is any
indication the buyers may not be done yet. With the markets
setting new highs nobody wants to be left out. The increased
volume today, of all days, shows that the conviction is growing.
Now that the majority of earnings are over and the Fed statement
has been cussed and discussed we will need to see if the buyers
continue to appear.

Bears are stumped. They are shocked and in disbelief at the gains
and are continuing to short every resistance level. However there
is a little less conviction with each bounce. The indexes are all
at the top of their uptrend channels and are strongly overbought.
The VIX hit a low of 22.47, a low not seen since May of 2002.
May 17th 2002 was the last relative high over 10,000 at 10353 and
the Dow closed over 10,000 for the last time on May-24th. That
bullish high on the 17th preceded a massive -2800 point drop to
the low of 7532 on July-24th less than 45 trading days later. The
stage is set. Are we set to repeat the May-October swoon? Will
the bulls manage to keep the rally alive? The only economic report
on Wednesday is Wholesale Inventories and it is not likely to
change the sentiment. The only thing that will change sentiment
is a couple days of declines and a Dow close under 8400. Until
then the uptrend is still intact and the dip buyers are alive
and well. With very strong resistance at Dow 8700-8800 they will
have to find help. Who knows, maybe the recent gains came from
Saddam investing his $1 billion cash withdrawal they have been
reporting all day.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


New high
Jonathan Levinson

Daily Pivots (generated with a pivot algorithm and unverified):

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
DJIA      8554   8571   8548   8565   8542
COMPX     1547   1536   1519   1508   1491
ES03M      948    941    932    926    918
YM03M     8691   8632   8563   8504   8435
ND03M     1179   1166   1150   1137   1121

The markets opened flat, hesitated for a moment, and then drifted
to new rally highs until the 2:15 Fed announcement.  There was a
brief dip, a push past the highs of the day, and then a steep
selloff that retraced just over 61.8% of the day's advance before
an uptick in the final minutes of the session.

Volume was strong on the COMPX and NYSE, with 2.1B COMPX shares
and 2.0B NYSE shares changing hands.  The VIX closed higher by
02 at 23.26, VXN added .44 to 32.13 and the QQV -.27 to close at

Of particular note was that the US Dollar Index fell through its
bear market support decisively, sinking throughout the day and
trading as low as 95.10 at this writing.  Treasuries saw
significant buying following the Fed announcement, closing just
under their highs of the day with the five year yield down 1.2
basis points at 2.674%, the ten year yield down 7.9 bps at 3.808%
and the thirty down 4.2 bps at 4.763%.

Daily Chart of the COMPX

I have drawn alternate interpretations of the upper trendline to
allow for the possibility that we have witnessed a pattern
failure of the bearish ascending wedge formation.  The bear wedge
is generally a reliable bearish pattern, and upside breakouts are
rare, according Bulkowski's "Encyclopedia of Chart Patterns".
Nevertheless, the oscillators are on buy signals, though toppy,
and for the moment, bulls are clearly running the show on the

Daily Chart of the INDU

I have drawn competing upper trendlines on the INDU as well, to
allow for the two possible scenarios.  While weaker than the
COMPX, the INDU's rise has been more sustainable, in my view,
given that it has been printing what looks like a bullish rising
triangle breakout on the daily candles.  The bearish
interpretation is to filter out the tweezer top on March 24th and
draw it as a bear wedge.  Today bore the hallmarks of a shooting
star top, as the index jumped up and then reversed its highs,
closing within the lower half of its daily range.

On to the futures:

Daily Chart of the YM

We see the same setup on the daily YM contract, but the bear
wedge interpretation fits better to my eye.  According to
Bulkowski, the bear wedge that "fulfills" tends to project to its
bottom print, which in this case would be in the 7400 area.  Of
course, three's significant support along the way, if indeed we
are witnessing the final candles of a bearish ascending wedge.

60 minute chart of the YM

There's little to add here as we zoom into the tail end of our
daily chart with 60 minute candles.  Support is at 8400 and the
10(5) stochastics favor the downside, despite the uptick printed
in the last half hour.

Daily Chart of the ES

In my view, the daily chart of the ES contract captures the
action most closely.  The tension was palpable as the ES broke
the upper trendline, and I received a flood of disbelieving
emails from bearish readers.  Tomorrow will be a pivotal day, as
support has climbed to 920.  The projection of this picture
perfect bear wedge is to the March lows below 800, if it

60 minute chart of the ES

As on the daily chart, the 10(5) stochastics are in a bearish
configuration.  We'll have a better idea tonight if there's
anything beyond wishful thinking in that closing candle uptick.

Daily Chart of the NQ

The daily NQ contract is a more troublesome formation when
compared with the ES.  Whether the move above the 1115 area was a
significant breakout will have to be seen on a retest.  There is
strong support at the 1100 level even ignoring the rising
trendline.  On this chart, I am far less confident of resistance
than I am of support.  The stochastics are overbought, but could
become moreso if the NQ continues to trend higher.

60 minute chart of the NQ

There's little to add on the 60 minute view.  Chart support
appears in the 1137 area, followed by 1127, 1115, 1100 and 1090.

I suspect that a great deal of clarity will be present by the
time the cash market opens tomorrow.  With CSCO's earning's being
digested tonight, the reaction or lack thereof will give us a
good indication of how much steam the bulls have left.


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

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A Brief Note
- James Brown

Today's market sentiment will be brief.  The main focus today was
the FOMC meeting and there was little expectation for a rate cut
today but there was hope the committee would change their bias to
"easing".  As is almost always the case, volatility in the
markets spiked higher directly after the interest rate
announcement of "no change".

True to form, the Fed's comments were vague and confusing.
However, by the end of the day, traders seem to feel encouraged
that the Fed was in an easing mood (most likely to cut rates in
the futures) than discouraged that the committee saw more risk
than strength to the economy.

Overall, the trend remains up.  Out of the twenty major industry
sectors we track only four closed negative and only fractionally
so. I took the time to look at nearly one hundred smaller
industry-specific indices and the two or three that looked some
what weak were only marginally so.  As I've said before, right
now it's tough being a bear when everything is in rally mode.
Skeptical market  watchers are begrudgingly starting to admit
this looks like a bull market.

The market internals were encouraging.  Advancing issues beat
decliners on the NYSE by more than 2 to 1.  The NASDAQ saw 18
winners for every 12 losers.  New 52-week highs totaled 327
compared with only 27 new 52-week lows.  If you've been watching,
that new lows number keeps getting smaller and smaller.  I also
noted that the  Wilshire 5000 total market index has managed to
close above resistance at 8800 for the third day in a row.  It is
quickly approaching possible resistance at 9000.  Up volume on
the NYSE was nearly three times down volume.  Up volume on the
NASDAQ did even better.

A few sectors I'm going to be watching for strength tomorrow are
the GSO software index, the SOX chip index, the BKX banking
index.  The GSO software group has been very strong and is about
to tackle tough resistance at 120.  The very strong earnings
report by ERTS tonight after the close might be the fuel needed
to do it.  Pondering the ERTS news tonight I looked at Take-Two
Interactive (TTWO), the next biggest rival for ERTS.  TTWO had
recently broken above its 200-dma and was fighting to hold above
resistance at $24.00.  The news tonight by ERTS might make TTWO a
potential long play for bulls.

The SOX chip sector finally did do a little catch up and has
broken over the crucial 350 level.  Let's see if INTC, TXN, QLGC,
XLNX and KLAC can build on their new relative highs.

Last is the BKX banking index.  Financials make up a huge section
of the S&P 500 and if the markets are going to continue to rally
they need strength in the banks.  It's essential that the BKX
hold above this 800 level.  So far so good.


Market Averages


52-week High: 10353
52-week Low :  7197
Current     :  8588

Moving Averages:

 10-dma: 8487
 50-dma: 8163
200-dma: 8311

S&P 500 ($SPX)

52-week High: 1107
52-week Low :  768
Current     :  934

Moving Averages:

 10-dma:  919
 50-dma:  870
200-dma:  880

Nasdaq-100 ($NDX)

52-week High: 1351
52-week Low :  795
Current     : 1153

Moving Averages:

 10-dma: 1117
 50-dma: 1049
200-dma:  996


Both volatility indices continue to "trade" near new lows.  Traders
are not showing much fear.

CBOE Market Volatility Index (VIX) = 23.26 +0.02
Nasdaq-100 Volatility Index  (VXN) = 32.13 +0.44


          Put/Call Ratio  Call Volume   Put Volume

Total          0.91        639,817       581,418
Equity Only    0.74        519,303       383,353
OEX            1.49         21,451        32,004
QQQ            2.46         24,741        60,769


Bullish Percent Data

           Current   Change   Status
NYSE          55.3    + 2     Bull Confirmed
NASDAQ-100    77.0    + 4     Bull Confirmed
Dow Indust.   56.7    + 0     Bull Confirmed
S&P 500       62.8    + 3     Bull Confirmed
S&P 100       62.0    + 1     Bull 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  0.99
10-Day Arms Index  1.04
21-Day Arms Index  1.07
55-Day Arms Index  1.26

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


Market Internals

            -NYSE-   -NASDAQ-
Advancers    1914      1863
Decliners     943      1262

New Highs     179       148
New Lows       18         9

Up Volume   1441M     1592M
Down Vol.    538M      487M

Total Vol.  2020M     2102M

M = millions


Commitments Of Traders Report: 04/29/02

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

Hmmm...not much new to report here.  The report is dated
April 29th.  The markets were still consolidating sideways
and had not yet seen the Friday session breakout.  The
numbers below show a slight strengthening of the Commercials'
net long positions and a very small increase in the Small
Traders' net short position.  Considering the Friday breakout,
guess who was "right"?

Commercials   Long      Short      Net     % Of OI
04/08/03      420,084   407,452    12,632     1.5%
04/15/03      424,219   409,853    14,366     1.7%
04/22/03      430,758   423,295     7,463     0.9%
04/29/03      432,710   419,245    13,465     1.6%

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year:   14,366  -  4/15/03

Small Traders Long      Short      Net     % of OI
04/08/03      136,173   122,006    14,167      5.5%
04/15/03      148,434   137,680    10,754      3.8%
04/22/03      147,068   140,153     6,915      2.4%
04/29/03      149,616   154,782     5,166      1.7%

Most bearish reading of the year:  10,754 - 4/15/03
Most bullish reading of the year: 114,510 - 3/26/02

E-MINI S&P 500

Yet again, the positions are reversed on the E-mini numbers.  The
Commercials bumped up their net shorts while the Small Traders
significantly added to their longs.

Commercials   Long      Short      Net     % Of OI
04/08/03      114,210   344,961   (230,751)  (50.3%)
04/15/03      119,316   390,555   (271,239)  (53.2%)
04/22/03      124,200   437,597   (313,397)  (55.7%)
04/29/03      134,751   472,247   (337,496)  (55.6%)

Most bearish reading of the year: (337,496)  - 04/29/03
Most bullish reading of the year: (222,875)  - 04/01/03

Small Traders Long      Short      Net     % of OI
04/08/03      319,460    35,629   283,831    79.9%
04/15/03      365,876    44,137   321,739    78.5%
04/22/03      395,596    40,480   355,116    81.4%
04/29/03      459,687    50,030   409,657    80.4%

Most bearish reading of the year: 283,831   - 04/08/03
Most bullish reading of the year: 409,657   - 04/29/03


Again, there isn't much change to be seen here as by April 29th,
the markets were mostly churning sideways, albeit with an
upward bias.

Commercials   Long      Short      Net     % of OI
04/08/03       44,257     36,711     7,546    9.3%
04/15/03       44,976     37,929     7,047    8.5%
04/22/03       45,647     38,531     7,116    8.5%
04/29/03       45,497     37,557     7,940    9.5%

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
04/08/03       11,365    17,790   ( 6,425)  (22.0%)
04/15/03       11,182    17,438   ( 6,256)  (21.9%)
04/22/03       10,929    20,376   ( 9,447)  (30.2%)
04/29/03       11,219    19,760   ( 8,551)  (27.6%)

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


Commercial traders remain net long the Dow Jones Industrials
with a slight increase in their overall long positions.
Small Traders maintained their net short position but saw
a drop in overall long positions during the week.

Commercials   Long      Short      Net     % of OI
04/08/03       18,566    12,616    5,950      19.1%
04/15/03       17,881    13,124    4,757      15.3%
04/22/03       16,942    14,750    2,192       6.9%
04/29/03       17,927    14,083    3,844      12.0%

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
04/08/03        5,886     7,964    (2,078)   (15.0%)
04/15/03        7,748     8,704    (  956)   ( 5.8%)
04/22/03        8,081     8,275    (  194)   ( 1.2%)
04/29/03        7,081     8,604    (1,523)   ( 9.7%)

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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Highest 4-Week Performers

Long-term investors looking to add some octane to their portfolio
may want to look at these hot performers over the past four weeks
in the equity fund class.  For our purposes, we will use the fund
finder on the marketwatch.nytimes.com website to quickly identify
which funds have performed the best for the 4-week period through
May 5, 2003, limiting our search to those funds which have assets
of $500 million or more.  You can run the search for all funds or
different asset ranges at your leisure.

Once we have identified the top 25 performing funds over the last
4 weeks, we'll input the various fund symbol's into Morningstar's
system (www.morningstar.com) to get updated fund performance/risk
data and see which funds stand out based on return, risk, expense
and other factors.  In the end, we will tell you which funds have
performed the best in the near-term and offer strong appreciation
potential in the long-term.

Screening/Evaluation Process

The NY Times.com online fund finder tool identified the following
25 funds as being the highest performing funds over the past four
weeks among all types of funds (assets over $500 million).  Three
funds on the list are institutional class funds and have been put
to the side, leaving 22 finalists as follows:

 Highest 4-Week Performers:
 +12.9% Buffalo Small-Cap Fund (BUFSX)
 +12.8% Neuberger Focus Fund (NBSSX)
 +12.6% Legg Mason Opportunity Trust (LMOPX)
 +12.3% Fidelity Advisor Value Strategies Fund (FASPX)
 +11.9% Franklin Small Cap Growth Fund (FSGRX)
 +11.7% Heartland Value Fund (HRTVX)
 +11.7% Legg Mason Special Investment Trust (LMASX)
 +11.5% Legg Mason Value Trust (LMVTX)
 +11.3% Royce Opportunity Fund (RYPNX)
 +11.2% Dreyfus Midcap Value Fund (DMCVX)
 +11.0% PIMCO Renaissance Fund A (PQNAX)
 +11.0% PIMCO Renaissance Fund B (PQNBX)
 +10.9% PIMCO Renaissance Fund C (PQNCX)
 +10.9% White Oak Growth Stock Fund (WOGSX)
 +10.7% Fidelity Europe Fund (FIEUX)
 +10.6% Fidelity Select Computers Portfolio (FDCPX)
 +10.4% Seligman Communications & Info Fund A (SLMCX)
 +10.4% Seligman Communications & Info Fund B (SLMBX)
 +10.3% Janus Venture Fund (JAVTX)
 +10.3% Fidelity Select Electronics Portfolio (FSELX)
 +10.3% Strong Advisor Small Cap Value Fund (SSMVX)
 +10.2% Royce Low-Priced Stock Fund (RYLPX)

Next we entered the symbols into Morningstar's Fund Compare tool
and noted the information provided in the default Snapshot View.
The Snapshot View shows the Morningstar category assigned to the
fund, and the fund's star rating, YTD return, and expense ratio.

Two funds currently have a Morningstar 5-star (highest) rating,
Buffalo Small Cap Fund (BUFSX) and Royce Low-Priced Stock Fund
(RYLPX).  According to the fund tracker, Buffalo Small Cap Fund
has produced high return with below average risk in relation to
its small-cap growth peers.  In relation to its small-cap value
peers, Royce Low-Priced Stock Fund has produced high return and
above average risk.  In each case, the fund's annualized return
performance over the trailing 5-year period ranks in the best 5%
of its Morningstar category.

The institutional share class of the Legg Mason Value Trust has a
Morningstar 5-star rating, but the primary class (LMVTX) carries
only a 4-star rating.  The difference between Morningstar's best
5-star rating and an above-average 4-star rating is due to total
operating expenses.  The 1.68% expense ratio associated with the
primary share class is 0.98% more than the expense ratio for the
fund's institutional class shares.  Still, the primary class has
a trailing 5-year return that ranks in the top 4% and a trailing
10-year return that ranks in the top 1% of the Morningstar large-
cap blend category.

The Seligman Communications & Information Fund and Strong Advisor
Small Cap Value Fund are also above-average "4-star" rated based
on overall risk-adjusted performance versus their category peers.
Seligman's fund has produced above average return with less than
average risk relative to other technology sector funds according
to Morningstar.  Strong's fund has produced above-average return
and risk relative to its small-cap value peers.  The Strong fund
is currently closed to new investors.

Next, we used the Nuts & Bolts View to see which funds are "open"
to new investors and what their respective expenses and load fees
are.  Several funds are currently closed including Dreyfus Midcap
Value, Franklin Small Cap Growth, Janus Venture and the PIMCO PEA
Renaissance Fund.  Those funds were eliminated from consideration
along with the Strong Advisor Small-Cap Value Fund.  We also took
out the Class B shares of the Seligman Comm. & Info. Fund because
of its high expense ratio (2.34%).  At 1.59%, the fund's A shares
are more reasonable.  The primary class shares of the three "Legg
Mason" funds have current expense ratios in the range of 1.68% to
1.90%, which is toward the upper-end of reasonable in my opinion.

William H. Miller II has 21 years with the Legg Mason Value Trust
for the longest manager tenure.  William J. Nasgovitz has managed
or co-managed the Heartland Value Fund for 18 years.  Kent Simons
has been associated with the Neuberger Berman Focus Fund for more
than 15 years.  Paul H. Wick, Seligman Communications/Information
Fund (13 years) and James D. Oelschlager, White Oak Growth Stock
Fund (11 years) are other experienced stock managers on the list.

In the next section, we tell you which funds we like the best on
the basis of absolute/relative performance as adjusted for risks
and costs, and taking into account manager tenure and the fund's
objective, style and strategy.  While each of these equity funds
have ranked among the highest 25 performers over the past 4-week
period, only the ones with the best return-risk-expense tradeoff
make our favorite funds list.

Our Favorite Funds

Pro-growth investors may want to consider the near-term and long-
term return potential of the White Oak Growth Stock Fund (WOGSX),
a large-cap growth fund run by Jim Oelschlager since 1992 or the
Buffalo Small Cap Fund (BUFSX), a team managed, small-cap growth
fund advised by Kornitzer Capital Management since 1998.

Oak Associates Fund: White Oak Growth Stock Fund (WOGSX) has put
up a YTD total return of 10.9%.  It seeks long-term appreciation
by investing primarily in established companies with large market
capitalizations.  That equates to an average market cap of $44.8
billion, close to that of the S&P 500 index, which has an average
market cap today of $48.3 billion per Morningstar.  Its P/E ratio
of 34.7 is decidedly higher than that of the S&P 500 index (24.5)
landing it in the "growth" style box.

Historically, White Oak Growth Stock Fund has been more volatile
than other large-cap funds because it concentrates net assets in
certain sectors and stocks, and owns stocks with higher relative
prices and earnings growth potential.  At March 31, the fund was
concentrated in four sectors - software, hardware, financial and
healthcare - and in 21 stock holdings.  Over 61% of total assets
are represented by the fund's top 10 holdings, a high-octane mix.

If you look past the fund's higher near-term volatility, you see
a strong long-term track record of performance.  For the 10-year
period as of April 30, 2003, Oelschlager generated an annualized
return for investors of 10.0%, beating the S&P 500 index by 0.3%
a year on average and the Russell 1000 Growth index by 2.1%/year.
His 10-year performance ranks in the top 12% of the large-growth
category, per Morningstar.  If you are searching for a fund that
can lead in market advances, consider this fund's annual returns
in 1996 (+32.3%), in 1997 (+24.3%), in 1998 (+39.5%) and in 1999
(+50.1%).  Only investors with strong stomachs for risk, however,
need apply.

Buffalo Small Cap Fund (BUFSX) is another fund we like, and have
profiled before.  Three Kornitzer Capital Management co-managers
share portfolio management responsibilities.  They pursue growth
of capital over time by investing in equity securities issued by
"small-cap" companies.  They target a mix of "value" and "growth"
companies with market caps of $1 billion or less and allow their
best stock holdings to grow.  The result is a fund that provides
exposure to the small- and mid-cap sectors, and to the blend and
growth styles boxes.

According to Morningstar, this buy-and-hold small-cap stock fund
has produced one of the best return-risk-expense profiles in the
small-cap fund group since launching the fund in 1998.  Over the
past five years, the Buffalo Small Cap Fund has produced a 12.5%
average annual total return for investors, ranking in the top 4%
of the Morningstar small-cap growth category.  The S&P 500 large-
cap index lost an average of 2.3% a year during the same period.

Like White Oak Growth Stock Fund, the Buffalo Small Cap Fund has
a very reasonable annual expense ratio (1.01%).  At $687 million,
funds assets are getting up there for a small-cap fund, but thus
far, performance has not been hindered.  Long-term investors who
seek a strong performing, tax efficient small-cap fund with less
than average expenses have an excellent "supporting role" option


With their growth investment biases, White Oak Growth Stock Fund
and Buffalo Small Cap Fund offer investors the potential to beat
other types of funds over the long run including those investing
in slower growing or stagnant stocks.  They have also shown that
they are capable of ranking among the highest performers in U.S.
stock market advances.  Both funds have performed very well over
the trailing 4-week and 13-week periods relative to the universe
of stock mutual funds.

Growth styles, however, tend to be more volatile than funds with
value or blend styles.  Long-term investors who prefer a "value"
approach to investing may want to look at Royce Low-Priced Stock
Fund (RYLPX) for their financial plans.  We didn't have the time
this week to look at the fund closer but it sports a Morningstar
highest 5-star rating and is advised by Royce Associates, one of
the better value managers in the business.

Don't discount the three Legg Mason funds either.  Their current
expense ratios are a little higher than they may need to be, but
Legg Mason has done a good job historically of compensating fund
investors for the costs and risks incurred by their mutual funds.

For more information or to download a fund prospectus, visit the
respective fund family websites.

Steve Wagner
Editor, Mutual Investor

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The Option Investor Newsletter                  Tuesday 05-06-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: AZO, HLTH
Dropped Puts: None
Daily Results
Call Play Updates: ADTN, IBM, KLAC, NXTL, SLM
New Calls Plays: None
Put Play Updates: GM, KSS
New Put Plays: HOV


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.


AutoZone, Inc. - AZO - close: 85.63 change: +2.03 stop: 82.00

What's that saying about "take the money and run"?  We've been
singing that tune on our AZO play over the past few days and
we're going to make it official tonight.  We couldn't have asked
for more from AZO, as our ultimate upside target of $85 was
exceeded on Tuesday, with the stock closing more than $10 above
where it was when we initiated coverage a few weeks back.  We're
closing the play tonight and moving on to fresh candidates.  Use
any bounce higher on Wednesday to gain an even better exit from
the play.

Picked on April 13th at  $75.24
Change since picked:      +10.39
Earnings Date          06/03/03 (unconfirmed)
Average Daily Volume = 1.19 mln

Chart link:


WebMD - HLTH - close: 8.89 change: -1.63 stop: 9.49

Sometimes you're the bug and sometimes you're the windshield.
Our high-risk lottery ticket play turned out to be a bust.
Shares gapped higher on Monday, making any entry even more
hazardous.  After the bell Monday, the company announces earnings
and beats by a penny.  That's a good but it obviously wasn't good
enough.  The Q1 net loss was smaller than expected but the
conference call must have derailed any enthusiasm.  Telling
investors that your comfortable with 2003 estimates but they'll
probably come in near the low-end of the range is not what Wall
Street wants to hear.  Plus, the company named a new CEO while
letting the prior CEO keep his position as chairman.  Throwing
salt in the wound was First Albany today reaffirming their
"neutral" rating on the stock (hey thanks) but also reaffirming
their $6 to $7 valuation call for HLTH.  Fortunately, shares
opened up above our stop before sliding quickly lower.

Picked on May 4th at $10.05
Change since picked:  -1.16
Earnings Date      05/05/03 (confirmed)
Average Daily Volume = 2.3 Million
Chart link:




Please view this in COURIER 10 font for alignment

CALLS    LAST      Mon    Tue

ADTN     44.00    0.33  -0.03  Strong but might dip
AZO      85.63    0.13   2.03  DROP, big winner!
HLTH      8.89    0.17  -1.63  DROP, big loser!
IBM      87.51   -0.68   0.99  Techs ahoy!
KLAC     43.10    0.15   0.66  SOX breaking out?
MEDI     35.38   -0.30  -0.29  Long-term, no update
NXTL     14.65    0.14  -0.75  Sleeping Beauty is groggy
SLM     113.86    0.06  -1.24  Profit taking?


GM       36.23   -0.26   0.49  Setting up for an entry
HOV      39.21    0.07  -0.86  NEW, Use the trigger
KSS      56.00   -1.15   1.69  A new lower high.

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ADTRAN, Inc. - ADTN - close: 44.00 change: -0.03 stop: 41.50

When we initiated coverage on ADTN, we were looking for an
initial target of $44-45 and that looks like it was certainly the
right level to select.  On Monday, the stock surged as highs as
$45.17 before pulling back into the close.  Tuesday's session saw
the bulls make another assault on the $45 level, but with less
conviction and again the stock fell back to close at $44.  With
daily Stochastics looking toppy, ADTN looks like it is going to
pull back a bit before pushing higher again.  Conservative
traders may want to consider Our stop at $41.50 should hold
unless the stock really falls apart.  With the strength of last
Friday's rally, we'll need to see some support build before we
can gauge the next high-odds entry point, but right now a rebound
from the $42 level looks like a good target.  Once we get that
rebound from a higher low, we'll be able to get a better idea of
whether the stock has the ability to push up towards our final
target near $48.

Picked on April 29th at  $40.70
Change since picked:      +3.30
Earnings Date          07/15/03 (unconfirmed)
Average Daily Volume = 786 K
Chart link:


Intl Business Mach - IBM - cls: 87.51 chg: +0.99 stop: 84.00

Tech sectors across the board continue to be strong and IBM has
been able to maintain its steady but rising trend.  The stock
offered traders a dip to $86.00 this morning before rebounding
towards the $88 level late afternoon.  We continue to believe
that IBM's quality earnings will win bulls' money over less
stable earnings results.

Picked on May 4th at $87.37
Change since picked:  +0.14
Earnings Date      04/14/03 (confirmed)
Average Daily Volume = 8.2 Million
Chart link:


KLA-Tencor - KLAC - close: 43.10 change: +0.66 stop: 39.95

As we had expected the SOX chip sector did managed to breakout
above the 350 level.  Bulls now hope to see the sector catch up
to the rallies displayed in other hardware related tech sectors.
Leading the chip group higher are stocks like INTC, TXN, QLGC,
XLNX and KLAC.  All of them have broken out to new relative
highs.  Short-term traders may want to target an exit near $45
but we're going to aim for $46, the November 2002 resistance.
Another dip to $42 might be a worthy entry point or if you're a
momentum trader than a move over $43.50.  Look for any new news
as KLAC is set to present at the JPM tech conference tomorrow
after the close.

Picked on May 4th at $42.15
Change since picked:  +0.95
Earnings Date      04/23/03 (confirmed)
Average Daily Volume = 11.4 Million
Chart link:


Nextel Communications - NXTL - cls: 14.65 chg: -0.75 stop: 13.90
Ouch!  Sleeping beauty here is still looking a little groggy.
NXTL has been unable to follow through on its big breakout last
week above the $14.65 level.  Shares have pulled back twice and
previous resistance has acted as new support.  That's the good
part.  Unfortunately, it looks like it's starting to lose its
momentum.  Buying the dips at $14.50 with a stop at $13.90 does
keep risk to a minimum but of NXTL doesn't break above $15.70
soon or if it closes under $14.50 we might drop it.  We're not
trading stocks here...options do suffer time decay.  Not helping
the bulls any was a downgrade by RBC capital markets.  They
downgraded NXTL on valuation concerns.

Picked on April 30th at $15.00
Change since picked:     -0.35
Earnings Date         04/23/03 (confirmed)
Average Daily Volume = 21.6 Million
Chart link:


SLM Corp. - SLM - close: 113.86 change: -1.24 stop: 111.50

Last Friday's strong rally sent our SLM play right up to the $115
resistance level and with the Banking index (BKX.X) surging
through the $800 resistance area, it looked like the stock was
going to be hitting new highs in short order.  Such was not the
case, however. Despite the fact that the BKX index is charging to
levels not seen since early July, SLM is having a hard time
staying above $115.  After just barely holding above that level
and posting a small-range doji on Monday, SLM fell back below the
20-dma ($114.23) on Tuesday, closing just off its lows.  This is
somewhat disconcerting in light of the strength in the BKX index,
and we now see the daily Stochastics just hinting at weakness.
On the plus side though, we have the stock holding above the mid-
line of the ascending trendline that has been in play since last
August.  Buying the dips still looks attractive in the $112-113
area, but wait for the rebound before entering.  We're still
counting on the 50-dma ($111.53) to be rock-solid support, so
we're raising our stop just slightly to $111.50 tonight.

Picked on May 1st at    $112.18
Change since picked:      +1.68
Earnings Date          07/17/03 (unconfirmed)
Average Daily Volume = 929 K

Chart link:



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General Motors - GM - close: 36.23 change: +0.49 stop: 38.10

Can you feel it?  An entry point is getting close on GM, and we
can feel it too.  While the stock is finding willing buyers near
the 20-dma (currently $35.75), there just doesn't seem to be a
strong urge to push the stock higher.  And with all the potential
fundamental problems affecting both the industry and the company,
it is no wonder.  The stock managed to test mild resistance at
$36.75 on Tuesday, but fell back due to the broad market pressure
following the FOMC non-event.  With the daily Stochastics rising
from oversold, we're looking for the stock to test stronger
resistance at the $37.50 level.  A rollover up there will be the
high-odds entry we're looking for.  In addition to that
horizontal resistance, there is resistance at the descending
trendline from the December and January highs and then the 200-
dma at $37.94.  More aggressive traders can consider entries on
successive failures near today's high of $36.75, with the
understanding that risk is to our stop at $38.10.

Picked on May 4th at    $35.80
Change since picked:     +0.43
Earnings Date         07/15/03 (confirmed)
Average Daily Volume = 5.23 mln

Chart link:


Kohl's Corporation - KSS - close: 56.00 change: +1.69 stop: 57.40

Not again!  Last week, our KSS play teased us with a break below
the $55 level and then the stock promptly reversed, nearly
stopping us out in the process.  But KSS rolled over right at
resistance and headed back down, breaking below $55 on Monday and
just eclipsing last Monday's intraday low.  Then, just like last
week, the stock surged higher today, hitting an intraday high of
$56.80, before falling back to close right at $56.  There's no
question the stock is building a pattern of lower highs and lower
lows, but in extremely volatile fashion.  Today's rally seems to
have been motivated by the nearly 2% advance in the Retail sector
(RLX.X) and if the breakout over $305 continues, even
underperformers like KSS will rise.  Clearly entries taken on
failed rallies are working much better than trying to enter on
the breakdowns.  So with Tuesday's rebound, the next likely entry
will come on a rollover near the $57 level.  Our stop is at
$57.40, just above the 20-dma ($57.13), and if the downtrend is
to continue, KSS can't move above that level.

Picked on April 27th at $55.02
Change since picked:     +0.98
Earnings Date         05/15/03 (confirmed)
Average Daily Volume = 3.73 mln

Chart link:


Hovnanian Ent. - HOV - close: 39.21 change: -0.86 stop: 41.00

Company Description:
Hovnanian Enterprises constructs and markets single-family
detached homes and attached condominium apartments and townhouses
in more than 196 new home communities in New Jersey,
Pennsylvania, New York, Maryland, North Carolina, Texas and
California.  The company offers a wide variety of homes that are
designed to appeal to the full range of buyers, from first-time
to luxury buyers.  Additionally, HOV provides financial services,
including mortgage banking and title services to the homebuilding
operations customers.  The company does not retain or service the
mortgages it originates, but rather sells them and the related
servicing rights to investors.

Why we like it:
One of the strongest performing sectors following the market
bounce in March has been the Housing sector, with the Dow Jones
Home Construction index ($DJUSHB) advancing more than 26% from
its relative low.  After the initial move, the index really got
moving after clearing important resistance at $340.  But over the
past couple weeks, the advance has been slowing, with resistance
looking pretty firm in the $365-368 area.  That certainly makes
sense as a resistance zone, with strong historical resistance
near $370.  While come Housing stocks are still looking strong,
there are others that are really starting to show some relative

At the head of that list is HOV, which has been beating against
the $40 resistance level for 2 solid weeks now, and is showing
little signs of being able to successfully move higher.  This
level was strong resistance last September and December as well,
with each rejection leading to a sharp drop in the stock.  It
certainly seems like we could get a repeat performance,
especially if the $DJUSHB rolls over.  There's an important date
looming in the not-so-distant future as well, with HOV set to
release earnings on May 26th.  If the stock does break down, it
should do so ahead of that event.

HOV has been working its way higher in a steady ascending channel
since early March, but the sideways trade of the last 2 weeks had
the stock cracking under the bottom of that channel on Tuesday,
without the slightest hint of a bounce.  The sharp selloff this
morning is interesting as it came on the heels of the company's
announcement of a 16% increase in new home orders.  Maybe it is
"sell the news" time.  There has been solid intraday support near
the $38.50 level over the past 2 weeks though, and the
possibility still exists for a rebound from that level.  So we're
initiating the play with a trigger at $38.40.  Aggressive traders
can enter on the initial breakdown, while those with a more
conservative style will want to target a subsequent failed rally
in the $38-39 area after the initial breakdown.  That gap from
early April in the $35.50-36.00 area will be our first target for
harvesting gains, with a possibility of a drop down to the $34
support level.  We're initially placing our stop at $41, just
above the recent intraday highs.

Suggested Options:
Short-term traders will want to focus on the June 40 Put, as it
will provide the best return for a short-term play.  Those
looking for a larger move down towards the early April gap will
want to utilize the June 35 Put or even the August 35 put, which
has higher open interest and provides greater insulation from the
spectre of time decay.  Note that we haven't listed any May
strikes, with expiration less than 2 weeks away.

BUY PUT JUN-40 HOV-RH OI=  17 at $2.65 SL=1.25
BUY PUT JUN-35 HOV-RG OI= 150 at $0.75 SL=0.30
BUY PUT AUG-35 HOV-TG OI= 877 at $1.65 SL=0.75

Annotated Chart of HOV:

Picked on May 6th at    $39.21
Change since picked:     +0.00
Earnings Date         05/26/03 (unconfirmed)
Average Daily Volume = 456 K

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The Option Investor Newsletter                  Tuesday 05-06-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Play of the Day: CALL - KLAC


KLA-Tencor - KLAC - close: 43.10 change: +0.66 stop: 39.95

Company Description:
About KLA-Tencor: KLA-Tencor is the world leader in yield
management and process control solutions for semiconductor
manufacturing and related industries. Headquartered in San Jose,
Calif., the company has sales and service offices around the
world. An S&P 500 company, KLA-Tencor is traded on the Nasdaq
National Market under the symbol KLAC. (source: company press

Why We Like It: (Sunday, May 4th, 2003)
It's all about hope.  The markets are rising on hopes that the
worst for corporate profits and America's economy is behind us.
That dream of a second half recovery that has failed to
materialize the last two years is still alive and well for 2003.
Despite these dreams the chip sector as measured by the SOX
index, while positive on Friday, has failed to breakout to new
relative highs.  We're betting that the semiconductor sector will
play catch up with the broader indices, especially if the Nasdaq
and the Dow Jones keep up the pace and build on their Friday

So why KLAC?  There were a lot of chip stocks to consider.  KLAC
announced earnings on April 23rd, 2003.  The company managed to
beat estimates by two-cents due to strictly managed cost cutting.
Net income fell by 21% over the same quarter a year ago and
management guided lower for its June quarter.  So why did shares
react positively to the news?  Again, it is that dream of a
second half recovery.  Many analysts now believe that the worst
for the semiconductor industry is behind it.  After a two-year
downturn things are starting to look up.  KLAC's management
confirmed the optimism with their own expectation for the
equipment industry to grow by 5% in 2003.  Besides, if KLAC has
already warned that the June quarter will be bad then the news is
already out.  Investors don't have to worry about an earnings
warning down the road.  We also like how KLAC actually managed to
close at new relative highs while most other chips are still
stuck below their mid-April high.

Some traders may want to look for a dip to $40-41 as their entry.
Others may want to wait for a move above $42.50.  Whatever you
choose, keep a sharp eye on the $SOX.  Where the SOX goes, KLAC
will follow.  Keep your ears open for any positive comments from
KLAC when they present at the JPM tech conference this week.

Play-of-the-day Comments (Tuesday, May 06, 2003)
Now that the $SOX has broken out above 350, we'd like to see a
retest of its old highs near 385 to 400.  KLAC is among several
chip stocks breaking out to new highs and look ready to go.

Suggested Options:
We're not going to list any May options due to their two-week
lift span.  Thus, Junes look like the best bet.  Septembers look
good if you feel like you need the extra time.  We didn't list
the 42.50 strikes but they do exist for those traders interested
in them.

BUY CALL JUN 40.00 KCQ-FH OI=5064 at $4.70 SL=2.20
BUY CALL JUN 45.00 KCQ-FI OI=7838 at $1.85 SL=0.90
BUY CALL SEP 45.00 KCQ-II OI=3035 at $3.80 SL=1.60

Annotated Chart for KLAC

Picked on May 4th at $42.15
Change since picked:  +0.95
Earnings Date      04/23/03 (confirmed)
Average Daily Volume = 11.4 Million
Chart link:

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