Option Investor

Daily Newsletter, Wednesday, 05/07/2003

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The Option Investor Newsletter                Wednesday 05-07-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Lower Highs
Futures Wrap: Yawn
Index Trader Wrap: Is the Demise of the Rising Wedges Upon Us?
Weekly Fund Family Profile: Legg Mason Family of Funds
Options 101: Further Reflections on MOPO

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      05-07-2003           High     Low     Volume Advance/Decline
DJIA     8569.56 - 27.80  8635.06  8529.04 1.91 bln   1533/1719
NASDAQ   1506.77 - 16.94  1523.91  1503.06 1.87 bln   1372/1767
S&P 100   470.31 -  2.40   474.57   468.91   Totals   2905/3486
S&P 500   929.62 -  4.62   937.13   926.41
RUS 2000  410.23 -  2.52   412.75   409.95
DJ TRANS 2457.26 - 30.47  2488.80  2456.91
VIX        23.76 +  0.50    24.60    23.14
VXN        32.03 -  0.10    33.36    31.73
TRIN       1.32
PUT/CALL   0.92

Lower Highs
Jonathan Levinson

The indices opened lower, drifted and then pushed to their highs
of the day, coming close but not touching the highs set
yesterday, before sliding throughout the afternoon to their lows
of the day and then drifting slightly higher into the close.
Volume was lighter across the indices, with the highest spikes at
the open and the close.

Daily Chart of the INDU

The daily chart of the INDU shows the failure at upper resistance
today, but with price still respecting the boundaries delimited
by the wedge trendlines.  I left out the descending trendline
from the weekly trend depicted below.  Today's candle illustrates
the confusion between bulls and bears, with a spinning top, the
bulk of the trade between the upper and lower blowoff extremes
with a neutral close.  Both the stochastic and MacD oscillators
are overbought and trying to turn down.

Weekly Chart of the INDU

The weekly chart shows the two most recent bear wedges and their
breakdown zone at the upper descending trendline.  Note the
toppiness of the 10 week stochastic here.

Daily Chart of the COMPX

The COMPX printed a bearish shooting star today, closing
relatively lower than the INDU and signaling more decisiveness to
the downside.  The stochastic gave a bearish cross from deep in
overbought, though today finished on lower volume.

Weekly Chart of the COMPX

The weekly view is setting up a potential bullish triangle
formation, and illustrates the prime source of concern for bears
at current levels.  Another wave higher from here would alter the
longer term picture considerably.

It was a quiet news day.  The Commerce Department reported that
March wholesale sales rose 1%, outpacing the .5% rise in
inventories. The inventory-to-sales ratio fell to a record low
1.21. This low ratio means that a proportionately higher number
of retail sales will be reflected as higher factory orders as the
buffer of inventories is diminished.  Sales of durable goods were
up 2.1%, its highest reading in 4 years on motor vehicle sales,
as consumers continued to take advantage of unprecedented
financing incentives.  Sales of non-durable goods increased 0.1%.
Inventories of durable goods rose 0.3%, again led by a 1.2% rise
in auto inventories.

The Energy Department reported that crude oil reserves fell by
800,000 barrels for the week ended May 2, surprising analysts to
the downside. Total inventories are now a reported 287.2 million
barrels, down 11.6% for the comparable period last year.
Gasoline inventories rose by 2.2 million to 207.8 million
barrels, bringing total supplies up to a decrease of 4.2% for the
comparable period last year.  The June crude contract closed at
$26.23 per barrel, up 51 cents +2% on the NYMEX. June heating oil
closed at 68.93 cents per gallon and June unleaded gasoline
closed at 77.96.

The Fed reported that consumer credit increased in March by the
smallest degree in 4 months, by $930 million or 0.6% to $1.74T.
This reading came well below expectations of 3.1B. Revolving
credit rose by $2.3B for a 3.9% gain. Non-revolving credit –
including car loans and other borrowing -- fell 1.7% or $1.4

Treasury bonds rallied, with yields diving.  The five year yield
finished near its low of the day, down 12.4 basis points to
2.55%, the ten year down 11.5 bps to 3.693%, and the thirty down
7.2 bps to 4.691%.  It was reported that Al Green was likely
buying treasuries in the open market "to boost reserves in the
banking system in order to combat deflation pressures," per Tony
Crescenzi, analyst with Miller Tabak. "This rumor, which has
circulated in the markets over the past few weeks, was reinforced
by the Fed's policy statement wherein the Fed indicated a concern
over the potential for a further decline in the inflation rate,"
he said.  Ben Bernanke's published statements earlier this year
about the fed having "a printing press" and being ready to employ
unconventional measures such as outright purchases of thirty year
treasuries might also have tipped off Mr. Crescenzi.  An article
on CNNfn observed that, "More abstractly, some traders might
worry [that] the Fed's warning [in yesterday's release] of
deflation -- despite interest rates at 41-year lows, which should
be inflationary -- makes the United States look less like ancient
Rome or Queen Victoria's Britain and more like 1990s-era Japan."

The fed added $6.25B in repurchase agreements, for a net addition
of $1B in liquidity against the expiring $5.25B 2 day repo
expiring today.

The US Dollar Index had another rough night last, bottoming near
95.10 and meandering as high as 95.80 before pulling back.  It
was reported that the US Dollar reached at 10 month low against
the Yen today.  The Canadian dollar had slipped .32% against the
USD, and the Euro gained .48% against the USD at the time of this

Daily Chart of the US Dollar Index

In corporate news, Newmont Mining (NEM) surprised to the upside,
reporting Q1 net income of $117.3 million, or 29 cents a share,
versus a loss of 3 cents a share in the year-earlier period.
Sales for the period jumped 74 percent to $864. 6 million.
Expectations had been for 18 cents per share and revenue of
$696.6 million. NEM attributed the results to a 59$ per ounce, or
20 percent, higher gold price, coupled with its mostly unhedged
gold position.  Imagine, increasing profits based on an increase
in pricing power of the product a company sells!  This has become
an almost revolutionary concept in the wake of the tech bust over
the past few years.

INTC was weak after reporting to the SEC an anticipated gross
margin percentage of 50 percent for Q2, below Q1's 52%.  The
company attributed this decline to higher startup costs and a Q1
benefit from the sale of previously reserved inventory.  It went
on to state that an uncertain global economy makes it difficult
to predict demand.  Q2 revenue is expected to decline to $6.4
billion to $7 billion, from Q1 revenues of $6.75 billion. Capex
spending is expected to decline to $3.5 billion to $3.9 billion
in 2003 from $4.7 billion in 2002.  The stock closed at $19.16
per share, down 1.94%.

Moody's Investors Services placed AMD on ratings watch for a
possible downgrade, citing concerns that its cash burn rate may
place AMD in the unenviable position of having to raise another
round of capital in the short to intermediate term.  AMD's shares
traded lower to 7.49, also down 1.96%.  Investors were no doubt
connecting the dots, taking MSFT down 1.46%.  If consumers are
not buying CPU's, they're probably not buying operating systems
either.  MSFT was hurt by news out of the EU setting a fall
deadline to resolve an ongoing tax dispute with the US concerning
incentives for US corporations, and threatening sanctions in the
neighbourhood of $4B.

Reports circulated in the morning that a new Saddam audio tape
had surfaced, exhorting the Iraqi people to reject the "invaders"
and assuring them that "victory is near".   The tape could not be
authenticated, however, and its impact on the markets were barely

CNN reported that the National Weather Service has issued new
tornado warnings in areas still trying to recover from heavy
storms in the lower Midwest, Mississippi Valley and Southeast
earlier this week.  Possible funnel clouds in northeast Louisiana
and northwest Mississippi were reported, with Tennessee's Cannon,
western DeKalb, southeastern Wilson, northern Marshall, eastern
Williamson, northwestern Bedford and Rutherford counties under
tornado warnings.  Severe storm warnings were issued for these
regions as well.

It appears that the markets are begin to turn their attention
back to economic and corporate data after blissfully ignoring a
steady torrent of bad results over the past months.  This sets up
a potentially dangerous environment for traders, because as the
wholesale sales and inventories data showed today, the news isn't
necessarily all bad.  Whether those data resulted from an ongoing
and unsustainable overindulgence in consumer credit spurred by
very low interest rates is a matter of speculation.  As the
charts illustrate, equities are having trouble pushing above
their upper trendlines, and it will take a strong round of buying
to propel them to the next level.  Whether this will come from
positive economic or corporate data over the coming sessions
remains to be seen, but until a clear resolution of the bearish
chart patterns depicted above, traders should be seeking to
exercise caution, particularly on the long side.  For tomorrow,
we await publication of the FOMC minutes for March, and initial
jobless claims (prior 448K, expected 440K for the week).


By Jim Brown

      05-07-2003           High     Low
DJIA     8560.63 - 27.73  8635.06  8529.04
NASDAQ   1506.76 - 16.95  1523.91  1503.06
S&P 500   929.62 -  4.77   937.22   926.41
NDX      1135.85 - 16.93  1152.68  1131.37
ES03M     929.50 -  5.25   937.00   925.50
YM03M    8548.00 - 22.00  8612.00  8501.00
NQ03M    1140.00 - 12.50  1159.50  1132.50

Daily Pivots (rounded to nearest point)
           R2     R1    Pivot   S1     S2
DJIA      8681   8621   8575   8515   8469
COMPX     1532   1519   1511   1499   1490
ES03M      942    936    931    924    919
YQ03M     8665   8606   8554   8495   8443
NQ03M     1171   1155   1144   1128   1117

Except for a late morning bounce that lasted about 90 minutes
the action in the market was very boring. The Dow only traded
in a 40 point range after 1:PM. The ES traded in a 3-point range
during this same timeframe.

The only material reports out today were the Wholesale Trade
report and the Consumer Credit. Wholesale trade inventory to
sales ratios dropped to an all time low at 1.21 with inventories
rising only +0.5% while sales rose +1.0%. Sales of Durable goods
rose +2.2%. It was actually a bullish report but the markets did
not react to it because the period covered was March. Old news
is no news it appears.

The other report was the Consumer Credit, which was much weaker
than expected at only +$900 million. That was the smallest gain
since November. Unemployment is slowing discretionary spending
on credit.

The markets did not react to anything, positive or negative
today unless you consider the 10:30 bounce a delayed reaction
to the Wholesale Trade report.

Helping the Dow after the close was news from Wal-Mart that sales
were better than expected over the Easter period. Jobless Claims
will be announced at 8:30 in the morning and there is a risk of
an upside surprise. After being over 400,000 for 11 weeks there
could be a statistical anomaly soon with a drop under 400K.
Traders would seize on this as bullish and buy again.

The Dow struggled after the midday peak at 8635 which was slightly
lower than yesterday's high of 8641. The uptrend is still intact
but the afternoon trading was lackluster. Initial support is 8500
on this current five day bounce. Critical support is 8350-8400.
The chart of the last months uptrend shows five tests of the
uptrend resistance top and five tests of the uptrend support. If
the current pattern hold we are due to test that lower support
again soon. This current bounce is five days old and matches the
longest up cycle since April 1st. Any weakness should quickly pull
back to the 8400 level where it should find a flood of buyers.
Whenever a trend is seen, such as the five-bounce cycle we have
now, the retail traders pile on. When this happens the institutional
traders take the opportunity to change the trend.

The next dip is the critical dip in my opinion. If they can bounce
it again now that earnings are almost over and the Fed is worried
about deflation then this rally has a chance of sticking. I just
do not see a bounce over 8650 without another retest of support
first. The lackluster trading today is a warning for me.

Dow Chart - Daily

Dow Chart - 90 min

The Nasdaq failed to hold over the December highs but did manage
to hold over the 1500 level for the third consecutive day. The
Nasdaq is very extended and could easily dip to 1450 while keeping
the uptrend intact. The Cisco earnings produced a drag on the
Index and could turn into the Achilles' heel that starts the next
cycle. Several earnings announcements including WFMI hit the
Nasdaq after the close but it remains to be seen if it carries
over to the open. The Asian tech stocks have not been any support
to the index this week as SARS fears and sales declines have been
holding back those stocks. MOT closed a plant in China due to
a SARS infected employee and late rumors on Wednesday were a
pending shutdown of an Intel plant.

I would look for Nasdaq 1500 to be the key. If we drop below
that level tomorrow we could attract some additional profit taking.

Nasdaq Chart - Daily

The ES held to the previous resistance top of the uptrend
channel, which has now turned into support at 927-928. This is
a very precarious position. The ES is clinging to this support
only by the slimmest of margins. Should this support fail the
next uptrend support is 924 followed by a distant 910. The
Futures are trading down in after hours and I think we will see
a retest of the 924 support at the open tomorrow.

ES03M Chart - 60 min

The NQ contract is about to test the uptrend support at 1130-1135
and could drop as far as 1100 on serious profit taking. Critical
support remains 1080. The uptrend resistance highs at 1163 remain
critical resistance. The NQ is very extended and needs to rest
but a bounce off the uptrend support could give the bears courage.

NQ03M Chart - 120 min

The Dow Futures topped at 8600 and are now looking for support
at 8500. The uptrend support is around 8450 tomorrow and right
in the middle of the expected range. The Dow appears to be
losing momentum but the battle is far from over. I would look
to be short under 8500 for the initial drop.

YM03M Chart - 120 min

For Thursday I would look to be short under the ES Pivot of 931
and add to that short on a YM drop under 8500. The bullish case
is fading and it may be tough for them to mount another convincing
rally this week. Jobless Claims could be a problem for both bulls
and bears with a departure from the current 400K+ trend.

Jim Brown


Is the Demise of the Rising Wedges Upon Us?

As I mentioned in this morning's first update, many global
ndices currently claw their way up from recent lows.  Many have
posted new P&F buy signals, but trade just under or near key
resistance, so that their actions mirror those in U.S. indices.
Watching them can help us gain insight into the strengths or
weaknesses seen in our own.

Today, the Nikkei started out with a gap above the 8110-8125
resistance, but soon dipped into negative territory before
beginning a tortured climb back toward that resistance.  Never
making it back to the opening high, the Nikkei closed just below
that 8110-8125 resistance, posting a gain of 26.21 points or
32%.  Tomorrow should bring the presentation to the government
of an emergency economic relief plan hammered out by the three
ruling coalition parties.  Recent gains in the Nikkei have
reflected optimism that the plan will stem the selling of bank-
held shares, but any disappointment or delay in the plan could
send the fragile Nikkei plummeting.  It's reached a new P&F buy
signal, but remains just under the P&F bearish resistance line,
and the bar chart looks far less optimistic than the P&F chart.
Japan's economy is the second largest in the world, so the
performance of this index should be of importance to us here in
the U.S.

Germany, the world's third-largest economy and the Eurozone's
largest, struggles with its own government program to avert yet
another recession.  Germany took a step closer to recession today
with unemployment numbers again rising, to 10.7% or 8.9% when
adjusted for EU standards.  Germany's Chancellor Gerhard
Schroeder attempts to enact measures that will ease unemployment
and avert another recession.  Those plans include cuts in jobless
benefits and reduced protections from dismissals in hopes that
smaller companies will increase hiring, but the measures face
fierce opposition. Germany's DAX struggled to hold onto the
psychologically important 3000 level today, ending just above
that level at 3005.72, down 61.23 points or 2%.  The FTSE 100
lost its battle to maintain 4000, closing down 13.50 points or
34%, at 3992.90; while France's CAC 40 maintained 3000, closing
down 33.60 points or 0.41%, at 3023.96.  All these indices are on
current P&F buy signals, but all struggle to maintain
psychologically and historically important levels.

With these performances in the foreign markets, the stage was set
for an indecisive day on our indices, and that's what we got.  As
I scan daily charts for the various indices, I see a succession
of small-bodied candles that indicate that neither the bulls nor
the bears could prevail.  Major support held, but so did major
resistance.  Most U.S. indices opened near the daily pivots,
traded down to S1 levels and then stayed somewhere between R1 and
S1 during the day.  One exception was the NDX, which ended the
day just below the daily S1 level of 1137.80, at 1135.85.
Jonathan Levinson writes the Market Wrap tonight and does an
excellent job covering the Nasdaq-related indices, but I thought
it might be instructive to look first at the NDX before turning
to other indices.

I've included an NDX 30-minute chart because it depicts the H&S
pattern that formed on the NDX over the last several days of
trading.  Today, the NDX briefly violated the 1134 neckline of
the H&S formation, but pushed back above that level just before
the close.

NDX 30-Minute Chart:

Today's daily pivot, S1, and R1 levels are labeled on this chart,
and the slanting blue lines compose an upward-slanting regression
channel that has contained NDX prices since mid-April.  Both the
30-minute oscillators shown here and the 60-minute (not shown)
indicate very short-term oversold conditions as the NDX
approaches the bottom of that regression channel, indicating the
possibility that the NDX could attempt a move back up while those
oscillators reset themselves.  ADX shows something interesting,
however, on both the 30-minute and 60-minute charts.  For the
first time since early May, selling pressure has been increasing
(blue line on ADX) and buying pressure has been decreasing, with
a bearish cross being made.  ADX (pink line) has been slanting
down, now just above 20, indicating that the momentum of the
rally has been slowing.  If selling pressure continues to
increase, bears may gain more confidence selling on resistance,
and may even gain the confidence to press the NDX below the H&S
neckline and out of the regression channel.

NDX Daily Chart:

Daily stochastics and RSI as depicted on this chart indicate that
any upside may be limited, with all indicating bearish divergence
(higher prices with equal or lower tops on the oscillators).
However, here the ADX shows that the selling pressure has not yet
affected the daily ADX indicator.  Although there may be a slight
flattening of the ADX near 26, it has not yet turned down,
showing that bearish traders must tread gingerly when considering
selling resistance.  If that upward trend is still intact, the
oscillator evidence can not be trusted even when showing bearish
divergence.  A move down through the 1126-1134 congestion zone
might convince bulls that the bears mean business however,
turning down the daily and weekly oscillators alike.  In fact, a
sustained move through that 1134 H&S neckline tomorrow predicts a
minimum downside target of 1104.  A move above the 1160-1180 zone
would put fear into the bears, with the 1320 level being the next
strong resistance to show up on the weekly chart.  However, with
daily and weekly oscillators indicating overbought conditions, it
seems unlikely the NDX could push that far.

Unlike the NDX, the Dow Jones Industrials traded almost all the
way back up to today's R1 level after touching the S1 level, then
bounced again from the S1 level at 8529 late in the day, almost
reaching the daily pivot again.  The Dow Jones Industrial's
decline might have been much steeper except for the performance
of Coca-Cola (KO), gaining a whopping 2.25 points (5.49%) to
43.27 on a Morgan Stanley upgrade to overweight from equal-
weight.  KO holds a 3.61% weighting in the DJI average.  Today's
KO gain was made on almost three times average daily volume, at

Like the NDX, however, the 30-minute and 60-minute ADX levels for
the DJI have shown a slowing of the recent uptrend as selling
increases. Unlike the NDX, that lessening of the upward trend
shows up on the daily ADX, too, with the daily ADX level sloping
down to 19.12, indicating that we should be seeing range-bound
trading on the DJI.  That below-20 ADX number shows that it
should be time again to sell resistance and buy support.  That
also means that we should be able to trust the evidence given by
the oscillators.

The daily DJI chart shows that RSI turns down, showing bearish
divergence with equal RSI highs and higher price highs.  Daily
stochastics are now in territory indicating overbought
conditions, but they have not yet turned down.  Weekly 5(3)3
stochastics (not shown) are also at levels indicating overbought
conditions and have flattened.

Dow Daily Chart:

Today's S1 level at 8529 (blue horizontal line on the chart
above) also lies near historical support and near the midline of
the regression channel that contains the Dow's prices.  A
violation of that level could send the Dow back to test 8400,
while a bounce could move the DJI back to the top of the
regression channel, currently just above 8700, but rising each

Those of you who follow my commentary on the Market Monitor know
that I follow the OEX more than the other indices, so I'll
concentrate on the OEX rather than the SPX.  Most characteristics
of the two are similar, with both now trading near the apex of a
rising wedge seen on the daily charts.  Although I've been
watching these rising wedges for some time, they have now
narrowed so tightly that they're at risk of losing their
relevance.  If the OEX and SPX do not definitively violate these
wedges within a couple of days, prices will instead issue out
through the apex of the wedges, negating their relevance.

On the chart below, the rising wedge is depicted by the green
lines, while the horizontal blue lines depict today's S1, Pivot,
and R1.

OEX 60-Minute Chart:

The 468.80-469.30 zone gained special significance today for the
OEX, as it was the location of recent historical S/R, as well as
the location (469.30) of today's S1 level.  It was also the
neckline level of a potential H&S formation for the OEX, a
neckline that the OEX refused to violate today.  That H&S
formation is more easily discerned on a 10-to-30-minute chart
than on this 60-minute chart.

As the above 60-minute chart shows, the 5(3)3 and 21(3)3
stochastics cycled all the way down toward levels indicating
oversold conditions while the OEX tested that S1 and neckline
area, with the fast line of the 5(3)3 stochastic already trying
to hinge back up.  RSI flattened, however and is inconclusive,
although recently, the RSI has been making a series of lower
highs while the OEX formed that H&S pattern.  This shows bearish
divergence, but so far, it's bearish divergence that refuses to
be confirmed.

Here, too, the hourly ADX shows that the recent uptrend has lost
strength, at least on a short-term basis, and selling has
increased with the line representing selling pressure crossing
over the line indicating buying pressure.  The ADX level hints
that on a short-term basis only, it's possible to buy support and
sell resistance on the OEX, with overhead resistance between 475-
476 and nearby support at 469.  A sustained move through either
level tomorrow would violate the rising wedge seen on the daily
chart, however, and might bring more selling or buying, no matter
what oscillators and ADX currently predict.  One note:  I would
expect some volatility around such a violation, so you might
consider waiting for confirmation before acting on the violation.

OEX Daily Chart:

The daily chart also shows oscillators in territory indicating
overbought conditions, hinting that those in bullish positions
should remain prepared to protect profits.  RSI and the shorter-
term 5(3)3 stochastics have already begun to turn down, but these
oscillators do not always deliver reliable signals in strongly
trending markets, and the daily ADX still indicates that this is
a trending market.  Although buying pressure may be decreasing,
selling pressure still seems to be decreasing, too.  Here, too,
though, a strong and sustained move through the rising wedge,
either to the upside or the downside, might prevail over anything
the indicators have to say.  A sustained move tomorrow below 469
confirms the H&S formation and predicts a minimum downside target
of 462.80, the support area for the OEX during the late-April
consolidation.  At that point, it would not be unusual to expect
a retest of the rising wedge if one has not yet occurred, while
hourly oscillators reset themselves to overbought.

A sustained move through 476 tomorrow might bring about a retest
of the 487 highs that have marked the upper boundary of the OEX's
trading range as seen in the weekly chart below.  With daily and
weekly oscillators already showing overbought conditions and with
hourly oscillators likely to have reset themselves to overbought
by that time, I would expect the OEX to have a tough time pushing
past that resistance without another pullback to gather strength.

OEX Weekly Chart:

Those of you who have read my commentary on the Market Monitor
have seen this weekly OEX chart on several occasions. The red
horizontal lines delineate the 385-487 trading range for the OEX
since last July.  The rising wedge is shown in green on this
chart, too, and the long-term descending trendline is depicted in
teal.  This is a semi-log chart because these give a better and
more realistic depiction of price action when the move has been a
big one.  This chart shows why there's so much indecision
currently on the OEX.  A lot depends on the outcome of the next
few weeks' trading:  a new bull market for the OEX or a return to
the trading range with the decision postponed.

Jeff's last Index Wrap included weekly and monthly pivot analysis
points.  I've used Q-charts high, low, and closing figures to
calculate the following daily pivot analysis points for tomorrow:

R2 941.80
R1 935.71
Pivot 931.13
S1 925.04
S2 920.46

R2 476.92
R1 473.62
Pivot 471.26
S1 467.96
S2 465.60

R2 8680.87
R1 8620.73
Pivot 8574.87
S1 8514.73
S2 8468.87

R2 1161.28
R1 1148.56
Pivot 1139.97
S1 1127.25
S2 1118.66

R2 1532.09
R1 1519.43
Pivot 1511.24
S1 1498.58
S2 1490.39

At the time this article was completed, Stockcharts.com had not
yet updated the bullish percent charts, but if you'd like to
check them for yourself later tonight, the appropriate symbols
are $BPSPX, $BPOEX, $BPINDU (for the Dow Jones Industrials),
$BPNDX, and $BPCOMPQ (for the Nasdaq).

Linda Piazza

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Legg Mason Family of Funds

The Legg Mason Funds based in Baltimore, Maryland is a family of
23 mutual funds designed to meet a range of investment goals and
objectives.  Like its cross-town competitor, T. Rowe Price & Co.,
Legg Mason Asset Management has developed a strong reputation on
both in the management of separate accounts and its mutual funds.

T. Rowe Price, established in 1937, had over $140 billion in net
assets under management at year-end 2002.  In 1990, Legg Mason's
total assets managed were just $9 billion, but since then it has
grown its aggregate assets under management to over $192 billion
as of March 31, 2003.  Legg Mason achieved this incredible asset
growth through a combination of internal growth and acquisitions.

Today, the firm's institutional investment management affiliates
include Western Asset Management Company, Batterymarch Financial
Management, Brandywine Asset Management, and Perigee Investment
Counsel, as well as Legg Mason Investments, (Legg Mason) Capital
Management, and Legg Mason Asia.  Legg Mason's corporate goal is
to be among the top 25 asset managers in the U.S. and in the top
50 category worldwide.

William H. Miller III joined Legg Mason in 1981, and assumed his
present position as president of the firm in 1989, after serving
as the firm's director of research and then as the firm's senior
VP and director of investment management.  Before coming to Legg
Mason, Miller was a corporate treasurer and pension fund manager
with J.E. Baker Company.  He has run the $8.6 billion Legg Mason
Value Trust since its April 1982 inception and the $1.5 billion
Opportunity Trust since its December 1999 inception.  Miller III
is a Chartered Financial Analyst.

Lisa Rapuano, an assistant portfolio manager with Legg Mason, is
another billion-dollar fund manager.  She joined the firm in '94
and has run the $2.1 billion Legg Mason Special Investment Trust
since January 1, 2000.  Rapuano is a CFA too.  Other key members
of the firm's portfolio management team include: Robert Hagstrom,
portfolio manager of the Legg Mason Focus Trust since April 1995
inception; Dale Rubiner, fund manager of the Legg Mason Balanced
Trust since October 1996 inception; and Jane Trust, fund manager
of three Legg Mason tax-free bond funds (over six years).  David
Nelson and Henry Otto each have manager tenures of five years in
their respective Legg Mason funds.

Legg Mason's mutual funds are designed to be "affordable" to the
individual investor.  Nearly all Legg Mason funds are offered on
a no-load cost basis and all funds have a low initial investment
requirement of $1,000.  The class A shares (on two funds) have a
front-end load of 4.75%.  According to Morningstar, fund expense
ratios range from a low of 0.70% on three tax-free bond funds to
a high of 2.60% on Legg Mason Europe Fund, Class C.  At least 12
Legg Mason funds have what we would consider to be above-average
expense ratios, using 1.41% as the Morningstar all-funds average.

For complete fund information, or to download a prospectus, go to
the Legg Mason Funds website at www.leggmasonfunds.com.  For more
information on Legg Mason as an investment firm or its investment
management affiliates, go to the main site, www.leggmason.com and
follow the link to Institutional Asset Management.

Fund Overview

Below is a summary of Legg Mason's mutual funds grouped by their
investment class, along with their Morningstar category for your

 Legg Mason Equity Funds/Morningstar Category:
 American Leading Companies Trust (LMALX), Large-Value
 Classic Valuation Fund (LMCVX), Large-Value
 Value Trust (LMVTX), Large-Blend
 Focus Trust (FOCTX), Large-Blend
 Special Investment Trust (LMASX), Mid-Blend
 U.S. Small Capitalization Value (LMSVX), Small-Value

 Legg Mason Specialty Funds/Morningstar Category:
 Balanced Trust (LMBTX), Domestic Hybrid
 Financial Services Fund (LMFNX), N/a
 Financial Services Fund A Class (LMFAX), N/a
 Opportunity Trust (LMOPX), Mid-Blend

 Legg Mason Global Funds/Morningstar Category:
 Global Income Trust (LMGGX), International Bond
 Europe Fund (LMEUX), Europe Stock
 Europe Fund A Class (LMEFX), Europe Stock
 International Equity Trust (LMGEX), Foreign Stock
 Emerging Markets Trust (LMEMX), Emerging Markets

 Legg Mason Taxable Bond Funds/Morningstar Category:
 U.S. Gov't Interm-Term Portfolio (LGINX), Short-Government
 Investment Grade Income Portfolio (LMIGX), Interm-Term Bond
 High Yield Portfolio (LMHYX), High-Yield Bond

 Legg Mason Tax-Free Bond Funds/Morningstar Category:
 Tax-Free Interm-Term Income Trust (LTITX), N/a
 Maryland Tax-Free Income Trust (LMMDX), Muni Single State
 Pennsylvania Tax-Free Income Trust (LGPAX), Muni Single State

The firm's flagship product, the $8.2 Legg Mason Value Trust, run
by president, William Miller III for more than two decades, seeks
to provide long-term capital appreciation.  In this large company
stock fund, Miller follows a value discipline, investing in large
capitalization stocks trading at large discounts to the manager's
assessment of their intrinsic value.  Since Miller seeks value in
all sectors of the market, including technology, and holds stocks
for the long-term, the Value Trust may drift into the Morningstar
blend style box.  However, purchases are still made using a value

Miller's other charge, the $1.5 Legg Mason Opportunity Trust, has
a similar value-driven approach as the Value Trust but may invest
in companies of all sizes.  Like its sibling, the fund's average
investment style may drift from the value style box to the blend
style box from time to time, but equity purchases are still made
by the manager following a value discipline.  Though Miller isn't
constrained by capital sector, industry sector or security type,
this specialty fund is currently categorized by Morningstar as a
mid-cap blend fund.  The term "multi-cap" may be a better choice
of words, with assets spread across the large, mid and small-cap

The $2.1 billion Legg Mason Special Investment Trust, managed by
Lisa Rapuano since January 2000, seeks to provide capital growth
over the long term by investing primarily in small/mid-cap U.S.
stocks that appear to be undervalued.  It also may invest in the
stocks of companies facing special situations.  Morningstar puts
the fund in the mid-cap blend category along with the Legg Mason
Opportunity Trust, having similar portfolio characteristics, but
the term "multi-cap" is applicable here also.  The two funds are
very similar in portfolio characteristics.

Each of the Legg Mason funds are designed to deliver "attractive"
investment results over the long run without incurring excessive
portfolio risk.  Since the largest Legg Mason stock funds follow
a "value" discipline and investments are made with a "long-term"
perspective, they may lag other types of stock funds when "value"
stocks and styles are out of favor with the market.  Because the
funds may pursue value opportunities in traditional growth areas
such as technology, however, they can participate in rallies led
by growth stocks and styles.

In the next section we review fund performance, risk and ratings.

Fund Performance

First off, let me say that the Legg Mason Value Trust sports one
of the best long-term records of performance in the business, up
an average of 15.7% a year since 1982 inception through March 31,
2003.  All of the fund's inception-to-date return performance is
attributable to Bill Miller, who has delivered significant alpha
for investors over the long run.  Miller's 15-year average total
return of 14.0% through March 31, 2003 ranks right up there with
the value camp's elite.  Only FPA Capital Fund, Longleaf Partners
Fund, Clipper Fund, Weitz Value Fund, and Davis New York Venture
Fund sport better 15-year annualized returns in the "value" fund
group, per Lipper.

According to Morningstar, Bill Miller's trailing 1-year, 3-year,
5-year and 10-year returns on the Legg Mason Value Trust rank in
the top decile of the large-blend category.  Suffice to say, the
fund has done an excellent job of capturing returns during stock
market advances and then and curbing losses during market slides.

Between 1996 and 1999, Miller put up "growth" style numbers, but
then between 2000 and 2002 conserved capital like a value-driven
fund might.  Miller's 3-year average annual loss of just 6.8% as
of May 6, 2003 on the Value Trust was 5.2% less than the average
annual decline of the S&P 500 index (-12.0%) during this period.

So, staying the course is an important ingredient in the formula
for success.  Miller's value discipline and low turnover results
in higher volatility in the short-term, but generally, investors
have been amply rewarded over long periods of time for the above-
average relative risk and expense incurred by the fund portfolio.
Over time, Miller has more than adequately compensated investors,
at least as far as the Value Trust is concerned.

Miller's other fund, Legg Mason Opportunity Trust, also has high
risk relative to its category peer group.  However, returns have
not been high enough to get this fund up into "4-star" territory
for Morningstar overall rating purposes.  Still, it is difficult
to say anything bad about what Miller has done over the trailing
3-year period through May 6.  His positive 0.2% annualized total
return over the most recent 3-year period looks great versus the
12% annualized decline by the market (S&P 500 index).  Still, it
sports only a Morningstar 2-star rating because of its high-risk

Four Legg Mason stock funds and one high yield fund are among the
YTD 2003 leaders as of May 6, 2003, as follows:

 YTD Return/Category Rank:
 +19.3% Legg Mason Focus (FOCPX), 1st Percentile
 +12.5% Legg Mason High Yield (LMHYX), 33rd Percentile
 +24.4% Legg Mason Opportunity (LMOPX), 2nd Percentile
 +13.6% Legg Mason Special Investment (LMASX), 5th Percentile
 +13.4% Legg Mason Value (LMVTX), 1st Percentile

You can see that Miller and the other portfolio managers at Legg
Mason are "hitting the mark" in 2003, capturing good returns for
shareholders.  As we saw yesterday when we looked at the highest
4-week performers, Legg Mason as a whole has performed very well
through the most recent market upturn, providing hope that it'll
be among the market leaders in the next major advance.  Miller's
numbers from 1996 through 1999 show that the Value Trust can and
will participate in growth-led markets.


It would be unfair to end this report without saying something on
the Legg Mason bond funds.  Three of Legg Mason's bond funds have
above average "4-star" ratings from Morningstar, so they offer an
attractive return-risk tradeoff for bond investors.  Another fund
is 3-star rated, so all in all, respectable risk-adjusted ratings
on the Legg Mason bond mutual funds, worth further consideration.

Still, it's hard not to think of William Miller III and the Value
Trust when you hear the Legg Mason name.  He's been a mainstay at
the firm for more than 20 years, providing superior total returns
for patient investors over the long haul.  Be prepared for higher
risk and expense, but Legg Mason over long time periods has shown
that it compensates investors well for the additional risks/costs
associated with their (retail class) equity funds.

Steve Wagner
Editor, Mutual Investor


Further Reflections on MOPO
by Mark Phillips

Last week, we spent our time together, discussing the next high-
odds shorting opportunity for the broad market, assigning it the
affectionate term of MOPO.  Well, actually we call it MOPO
because I'm too lazy to keep writing out "Mother Of all Put
Opportunities".  GRIN  In the past week, there have been some
interesting technical developments and with earnings season
winding down to the last few stragglers and the May FOMC meeting
behind us, I thought it would be productive to address those
changes.  Not only that, but in playing around with the charts
this afternoon, I made a couple interesting observations that
escaped my attention last week.

In case you missed our discussion last week, you've got a fair
amount of catch up reading to do before today's discussion will
make any sense.  Fortunately, those articles are conveniently
archived on the OI website, and you can access them using the
following links.

MOPO - Remember That Term?

Setting Up For MOPO

In full recognition of the fact that we've had an impressive
rally over the past couple months and the bulls are still very
much in charge, we don't want to be in an excessive hurry to
start initiating full bearish positions.  Sure the market looks
over-extended, but that doesn't mean it can't ratchet a few
notches higher before the turn comes.  To that end, we've focused
our attention on a few of the more consistent earmarks of bearish
turning points for the market.  The first consideration is always
price, and we've taken a pretty detailed look at the S&P 500
(SPX.X)in our past discussions, so let's stick with that venue
today.  Here's the updated chart.

Daily Chart of the SPX

Despite the daily Stochastics remaining pinned in overbought
territory for over 2 weeks, price just continues climbing higher.
This is actually a plus for our MOPO setup, as the market isn't
really pausing to catch its breath.  We have a clear upside
breakout above the top of the multi-year descending channel and
it is looking more and more like the bearish ascending wedge is
going to result in a pattern failure.  We've cracked above the
top of that wedge, but no confirmation of that breakout yet.  It
is still entirely possible for the SPX to break down through the
bottom of the wedge (currently right at the key 920 level) and
give us a belated, but valid bearish resolution to the pattern.

Recall last week that I said a decisive breakout over 920 didn't
necessarily negate the potential for a very nice MOPO play, as we
have additional resistance in the 935-940 area and then again at
950-960, near the highs from last August.  But there's something
that's been bothering me since last Friday's breakout over the
top of the descending channel.  For a technical study that has
held so consistently for so long, a breakout above that level
should have had some follow through.  But we didn't get it, with
the last 3 days surging higher, falling back and in the end,
leaving us right where we ended the day last Friday.

Then I remembered something Linda Piazza taught me awhile back --
that when looking at longer-term patterns, the conclusions we
arrive at carry more validity when using a logarithmic scale on
the chart.  So I converted the SPX chart above to LOG scale and
all of the sudden things started to make more sense.

Daily Chart of the SPX - LOG Scale

You'll notice that the bearish wedge doesn't change at all,
because it is a shorter-term pattern, covering only a couple
months.  But look how much the upper channel line shifts to the
upside!  That upper channel line now crosses at about 965,
falling to about 956-958 by the end of May.  What that tells me
is that we still have a little bit of ground to cover to the
upside before we'll really be in MOPO territory.

Next up is our good friend, the CBOE Volatility Index (VIX.X).
Contrary to its recent action, where it kept falling in spite of
the fact the market couldn't make any headway, the VIX is now
holding fairly steady while the market continues to trudge
higher.  Take a look.

Market Volatility Index (VIX) - Daily Chart

Compare that VIX chart to the SPX chart and you can see that
there has definitely been a change in the inter-relationship over
the past couple weeks.  The excessive fear has been almost
completely drained out of the market, leaving a tiny little wall
of worry, represented by the gap between the current value of the
VIX (23-24) and the area of dangerous complacency represented by
the 19-21 area.  This is actual good for our MOPO plan, as
scaling that wall of worry and dropping the VIX down into that
"complacency zone" should coincide with the SPX trudging its way
higher to test that 950-960 area.  It could happen by the end of
the week (very unlikely), or it could take until the end of the
month (or longer), but it does give us a target to keep our eye

The last major piece of the puzzle in my mind is the Bullish
Percents (BP).  When we left off our discussion a week ago, the
SPX BP was sitting at 56% and we were looking for it to at least
move up to the 65% area, as a first test.  That's the site of the
bearish resistance line on the PnF chart of the SPX BP and likely
to provide some resistance.  But I've got a sneaking suspicion
that the BP reading is actually going to make it higher and
actually probe above the 70% (overbought) threshold.  How will we
know how high is high?  It's really a matter of slowing momentum,
and I've found the best way to find that turning point is by
looking at the Sharp Chart of BP, as described and shown in last
Monday's article, "MOPO - Remember That Term?".  Our ideal setup
is to see the BP push up above 70%, turn down through its 10-dma,
with confirmation coming from the CCI oscillator traversing back
below the zero line.

As you can see, there are still a lot of things that need to fall
into place before we're ready to start stepping into this MOPO
play, but things are playing out just how we'd like.  Keep your
powder dry for now, because when everything sets up, we'll want
all the ammunition we can get our hands on!

Prosperous Trading Wishes to All!


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The Option Investor Newsletter                Wednesday 05-07-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: NXTL
Play of the Day: No Play of the Day Today
Market Watch: Bears Circle The Corral

Updated on the site tonight:
Market Posture: Bulls Take A Break

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Nextel Communications - NXTL - cls: 13.82 chg: -0.83 stop: 13.90

Bulls keep trying to call NXTL but all they're getting is a wrong
number.  Twice shares bounced off previous resistance-now support
at $14.65.  Twice dip buyers bought the bounce thinking it was a
gift before NXTL rallied higher on its strong earnings report.
Unfortunately, it has turned into a bad bet.  Early today we
commented on the MarketMonitor that NXTL's breakdown below the
$14.50 level (also discussed last night in the Tuesday update)
was bad news.  Shares tried to hold on to the $14.00 mark but by
the day's end sellers had broken through support.  While one
could hope that the congestion of moving averages near $13.00
might hold the stock, there's nothing stopping it from returning
to the rangebound trading between $12 and $14.  We're closing the
play with a loss.

Picked on April 30th at $15.00
Change since picked:     -1.18
Earnings Date         04/23/03 (confirmed)
Average Daily Volume = 21.6 Million
Chart link:


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Bears Circle The Corral

American Intl Group - AIG - close: 56.55 change: -0.95

Wow! Sometimes the correlation between a stock and its sector
index or the major market indices is uncanny.  Checkout a chart
of the IUX insurance sector for the last 9-10 months.  Now look
at a chart of AIG.  They are almost identical.  Notice on AIG's
daily chart that shares have spent two weeks fighting with its
descending 200-dma and it looks like it's about to lose.  Now
look at AIG's weekly chart.  What direction is this stock headed,
up or down?  Right... this looks like a short with a very clearly
defined level of resistance to place your stop above.  To make it
even sweeter, the daily oscillators are all beginning to roll
over from overbought.  Grrr....



WebMD - HLTH - close: 8.59 change: -0.30

HLTH was recently a very high-risk lottery-style call play on
OptionInvestor.com.  We were speculating on their earnings
announcement after the bell on Monday.  Considering that HLTH was
one of the top 20 most shorted stocks, the thought process was
that any big earnings surprise to the upside could spark a major
short squeeze.  Given the recent earnings surprises of EBAY, AMZN
and YHOO this didn't sound too outlandish.  Shares did rally
higher on Monday but the earnings report didn't produce the
numbers needed to scare the shorts.  The next day the stock was
sold in disappointment and a broker reiterated their "neutral"
rating and a $5 to $6 price target based on their valuation
models.  The sell off has continued into Wednesday and the stock
is approaching critical support at $8.00.  Looking at the daily,
weekly and point-and-figure charts one can see that a breakdown
at the $8.00 level would indeed be disastrous for the bulls.
Should this occur a pull back to the $6 or even $5 range would
not be out of the question.  Definitely one to watch for the
nimble trader.



Amgen Inc - AMGN - close: 59.55 change: -1.42

AMGN is the biggest component in the BTK biotech index and the
stock's weakness these last three days has weighed heavily on the
sector.  It looks like investors have taken the last couple of
weeks to take profits after the stock popped higher on its
earnings news in April.  The breakdown below $60 might concern
some technicians but the stock's true rising trendline of support
is much closer to its simple 50-dma.  Right now that's about
$58.60.  We're going to look for a bounce at the 50-dma and if it
rebounds back over the $60 mark then aggressive traders might
want to consider a long play.  Should it break down then look for
a move below $57, which is significant support.  A move below $57
might be a trigger to open bearish positions.



Black Box Corp - BBOX - close: 37.06 change: +2.46

BBOX has been on the play list more than once this year.  Most
recently it was a call play but we dropped it due to lack of
movement.  Unfortunately for us, it rallied into its earnings
announcement, which came out today.  The company beat by two
cents.  The stock shot up on the news and hit its 200-dma on an
intraday spike.  Combine the fact that BBOX's earnings news is
out and CSCO's news is out (and not positive going forward) this
could be an entry for very aggressive bears with a stop above
today's high.  Just keep in mind that the $35 and the $33 levels
might be support.



RADAR SCREEN - more stocks to watch

RMD $36.80 - Moving from the Watch List to our Radar Screen,
shares of RMD are pulling back to the $36 level as discussed on
Monday.  A bounce there with a tight stop might be a profitable
entry point.  However, should RMD break $36 then a quick retest
of long-time resistance of $34 as support would be expected.

MGA $60.79 - Here's another one that was on the Monday watch
list.  Sure enough it has broken out above the $60 level.
Wednesday's session offered nimble traders another chance to buy
a dip at $60 before bouncing.  We believe their earnings report
is expected tomorrow.  Watch out for more volatility.

PIXR $59.41 - Shares of the digital movie studio continue to
advance slowly higher.  The last several days have been an
unsuccessful battle to break over the $60 mark.  It looks like a
breakout could occur soon.


Bulls Take A Break

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


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