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Daily Newsletter, Thursday, 05/08/2003

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The Option Investor Newsletter                Thursday 05-08-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Beginning of the End
Futures Markets: Cliffhanger
Index Trader Wrap: Lower Highs, Lower Lows
Market Sentiment: One More Day?
Weekly Manager Microscope: Frederick L. Reynolds: Reynolds Fund
(REYFX)


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      05-08-2003           High     Low     Volume   Adv/Dcl
DJIA     8491.22 - 69.40  8575.11  8477.36 1.67 bln 1442/1774
NASDAQ   1489.69 - 17.10  1504.04  1486.91 1.59 bln 1232/1937
S&P 100   465.34 -  4.97   470.31   465.08   Totals 2674/3711
S&P 500   920.27 -  9.35   929.62   919.72
W5000    8763.63 - 84.90  8848.56  8760.00
RUS 2000  407.68 -  2.55   410.23   406.92
DJ TRANS 2434.14 - 21.70  2457.59  2427.47
VIX        23.69 -  0.02    24.40    23.08
VXN        33.29 +  1.29    34.03    32.72
Total Volume 3,520B
Total UpVol    760B
Total DnVol  2,680M
52wk Highs  469
52wk Lows    30
TRIN       2.22
PUT/CALL   0.97
*************************************************************

Beginning of the End

Or is it the end of the beginning? The markets slid a little
farther on Thursday but it was far from a sell off. Where the
bears can be seen waving signs saying the end is near the bulls
are actually excited about the pull back and are looking for
a resumption of the rally soon. To them the profit taking is
just the end of the beginning and the first wave of many future
waves. Only one side is right.

Dow Chart - Daily




Nasdaq Chart - Daily





The day started out with a gap down open after the Jobless
Claims report, a speech by Greenspan and worries about earnings
depressed the premarket futures.

The Jobless Claims stretched their consecutive weeks over 400K
to 12 with -425,000 new claims last week. The four-week moving
average rose to 446 and the highest in more than a year. Sentiment
many be improving but jobs are not. Corporations are still
dependent on cutting jobs to cut costs to show earnings instead
of losses until the economy recovers. Lower costs will mean
higher profits when the recovery comes but with close to half
a million consumers losing their jobs each week there may not
be anybody left to pay for the economic recovery. The current
insured employment hit 3,665,000. (2.9%) This means only about
one half of the workers currently without jobs are receiving
unemployment. Benefits for the rest have already expired or
they were not eligible.

Contrasting the Jobless Claims report the Chain Store Sales for
April rose an unexpected +3.2%. This was attributed to a late
Easter and a shopping shift into April. If you combine March
and April the rate fell to a modest +1.5%. Despite the gains
the majority of retailers reported sales below plan. Only GAP
and WMT reported gains over their sales plans. The lagging
consumer and lack of must have products is producing the anemic
results. Auto sales picked up in April and this will be reflected
in the broader based retail sales report next week.

The combination of the two reports provided a bounce off the
bottom at the open once investors decided the bad news was
already priced in and there was nothing new. The rally failed
at yesterday's close and the markets drifted lower as traders
waited for the FOMC minutes at 2:PM. Those minutes did not
show anything new but the market could not sustain any rally
attempt and barely held 8500 into the close. The minutes showed
the Fed had realized that the 4Q economic bounce had faded and
the consensus of the group was that Iraq ate the economy as the
country prepared for war. They expressed concern and appeared
to have lost earlier confidence that the economy was on the right
track. They decided not to put out a balance of risks statement
because they feared the economy could remain weak even if the
war was resolved quickly. They feared "fundamental economic
problems" such as lingering impact of the tech bubble. They
also participated in a series of conference calls as the war
began and may have came close to cutting rates when the war
appeared to be not going smoothly. Their biggest fear was the
declining job market and it has gotten significantly worse since
the March FOMC meeting. Based on these minutes and the statement
from this weeks meeting it is clear the Fed is deeply concerned
about a fundamental weakening in the economy that is not war
related. Text of Minutes: http://www.federalreserve.gov/fomc/minutes/20030318.htm

The Cisco earnings continue to weigh on the market. The CSCO
expectations had been for a pickup in business based on comments
made by Chambers and his CFO in prior weeks. The EDS earnings
last night also did not inspire traders that the tech sector was
growing. Even earnings winners like PIXR and XMSR got killed
today as traders expecting the moon got reality. First Call
said they have revised the expected earnings growth for the
2Q to only +6%, +12% for Q3 and +22% for 4Q. The problem
according to them was that all hopes are being hung on the 3Q/4Q
but we really will not know what corporate guidance will be until
the end of July. With 58% of S&P companies already warning for
the 2Q they claim there could be a substantial drop in estimates
if the July earnings cycle goes badly. This concern that the
recovery may not appear is starting to filter through the
markets.

That concern is still very slight if you gauge it by the stock
market but the bond market appears positively panicked. The
stock market appears to be welcoming a slight pullback as a
buying opportunity while the bond market appears to be going
into bunker mode. The bond futures are hitting new multiyear
highs while the dollar is hitting multiyear lows. That is good
if you are selling U.S. products overseas but bad for overseas
investors. Foreign investors account for 10% of our market and
a falling dollar, falling economy and falling interest rate is
very detrimental to attracting money to our markets. The ECB
and the Bank of England both refrained from lowering rates
today which makes a rate cut for the Fed even tougher in June.

There is a thought underway that the Fed is keeping pressure
on bonds. The Fed has said they might resort to an artificial
cap on rates by buying an unlimited number of bonds on the open
market. This keeps real rates low without the need for the
Fed funds rate being lowered. Lower real lending rates spurs
a lower cost of capital and if they can push rates low enough
it would create another wave of refinancing and another round
of stimulus to the economy. Consumers freed up about $800
billion in home equity in the current refi cycle. Another round
of even lower rates could add another $100-$200 billion if the
rates were low enough. The 30-yr mortgage rates fell to 5.21%
in Colorado as of 6:PM today. That is pretty cheap!

All of that does not help the stock market in the short term.
The market is leery of buying stocks when the bond market is
soaring. They feel they are missing something important in the
news and they pull back from placing large orders. With bonds
being beat up in the press lately as an investment that had
run its course there were several attempts to sell them off.
All failed and with yields nearing decade lows again and the
Fed telegraphing a rate cut in June the squeeze is on.

The market drop today was not much of a drop. Considering the
current rally is the longest trough-to-top rally since 9/11
investors on the sidelines are actually eagerly awaiting
a pull back so they can get in. Those in the market are showing
no interest in selling. The drop today was on light volume and
other than the one major sell program at 12:00 the selling was
very casual. The new 52-week highs still came in at 469 with
only 30 new lows. The A/D line was only about 7:5 negative,
which is almost a push. The bulls were scratching their heads
about why there was not more selling but were still ecstatic
that the selling was limited. The dip-buying urge is definitely
alive and well.

The Dow dropped -69 points to close at 8489 and just slightly
under the prior resistance at 8500. The index is still clearly
above the uptrend support at 8400-8435. The Dow is in no danger
of a trend change unless that 8400 level is broken severely.
The Nasdaq closed well under 1500 and has risk to support in
the 1435-1450 range. This is still well within the uptrend
support range. The Nasdaq is not in danger of breaking that
trend until something in the 1350 range and that is weeks
away at the speed we are moving. Any significant change in
sentiment could of course accelerate that rate.

Tomorrow is a tossup. There are no economic reports and we
will be left to trade on stock news. It is the Friday before
expiration week and that has been mixed lately. Friday and
Monday could be boring as hell or full of adrenaline. The
markets want to go up but they are still confused. They see
the weak economic news and soaring bond market and realize it
should be going down instead. Some bulls are glad it isn't and
others are glad it is because it provides them that entry point.
Because of this selling is likely to be met with buying and
traders trying to square up option positions will add to the
confusion. I would not personally be adding to long positions
until the smoke clears and we get past expiration Friday.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Cliffhanger
Jonathan Levinson

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

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
DJIA      8645   8616   8547   8518   8449
COMPX     1509   1500   1493   1484   1477
ES03M      934    927    923    916    912
YM03M     8596   8537   8493   8434   8390
ND03M     1146   1132   1124   1111   1103


The markets gapped down, filled their downside gaps in varying
degrees, sunk back down and drifted until selling off into the
close, closing at or near their lows of the day.

Volatility saw some pickup on the NDX while the VIX closed down
02.  Volume picked up on the NDX over yesterday, while the SPX
and INDU saw lighter volume on today's decline.

All the indices closed on the 13 day sma's, with a remainder of
doubt as to whether they would bounce within their daily uptrend
or fail as expected by the bearish ascending wedge formations
we've been profiling for the past weeks.  The daily chart of the
QQQ is the most bearish of the bunch, leaving a perfect
gravestone doji on higher volume, with traders crowding the
hardest toward the exits. Though NDX volatility was up only .15,
the VXN (COMPX volatility) was up 1.29 to 33.29.


Daily Chart of the QQQ




While the daily candles look decidedly bearish, the 10(5)
stochastic on the 60 minute NQ3M contract is reaching a level
where it will have to begin trending in order for today's decline
to continue:

60 minute chart of the NQ3M



Although it's in oversold territory, there's no sign of a
reversal from the 10(5) stochastic.  There's also nothing bullish
about the violation of the ascending trendline, although this
support level has yet to fail as depicted by the horizontal
support line.  Nevertheless, this week has done significant
technical damage to the NQ3M, and to my mind, a break below
today's low of 1117.50 will bring a long awaited confirmation to
bearish traders.

Daily chart of the ES



Although my chart only picks up the bottom piece of today's
closing candle, we see that it printed below the ascending
trendline of the bearish ascending wedge on a confirmed sell
signal from the 10(5) stochastic.  It will take a return to
within the pattern, above 923, to convince me that we didn't see
the beginning of a downside breakout in fulfillment of the chart
pattern.

60 minute Chart of the ES3M




On the 60 minute candles, there's still ample latitude to debate
whether today was the beginning of a breakdown or the setup for a
bounce.  The 10 hour stochastic is bottomy and set up for a
bounce from oversold.  This contradicts the setup on the NQ3M
contract, and tomorrow will be telling as to which will prevail.
Bulls prefer the setup on ES3M to that on the NQ contract.  I
have highlighted the downtrend on the stochastic oscillator here-
to get a bounce going to the upside, that line will have to be
broken.

Daily Chart of the YM



We see the same setup on the daily YM contract as for the ES.
The longer term cycle has topped and is rolling over, but within
the established uptrend the shorter cycle has bottomed.  If this
move is more than a short term correction, then the oscillator on
the 60 minute candles will begin trending as the longer term
rising trend fails.  If not, expect a bounce to above 8600.

60 minute chart of the YM



After spending enough hours, days and weeks within a particular
market trend, one develops a wide array of impressions of the
experience.  I can recall watching wedges play out far longer
than I would have thought possible or palatable, as the price
tries to squeeze itself into the eye of a needle.  If the emails
I've been receiving for the past several weeks are any
indication, many already have that impression and are living this
bearish ascending wedge to the fullest.  I know I'm sick of
watching and writing about it.

In a vacuum, I'd be remaining undecided on the above charts-
longer cycles toppy but potentially still trending, shorter
cycles bottomy and ready to reverse.  However, we have the VIX,
VXN and QQV at relative extreme lows, and most breadth measures
are at levels more commonly associated with tops than with
bottoms or even midpoints in bull runs.   We have bullish
confidence at multi-month, and possibly multiyear highs.  Abby
Joseph Cohen called for another 25% of upside from here.  We
markets that have been lofted on the war rally, the end of war
rally, the North Korean disarmament talks rally, the end of SARS
rally, and the "economy simply can't get any worse so it must be
time to buy" rally.  Other than excessive short covering or
intervention, I believe that it's going to take something
substantial to propel the markets up strongly enough to blow the
roof off those upper trendlines.  The most likely bullish
scenario I see is a squeeze ever tighter within the bear wedges.
However, I'm personally betting on the patterns fulfilling
themselves, which, according to the conventional wisdom on bear
wedges, is to the downside.


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

Lower Highs, Lower Lows
Jonathan Levinson

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

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
DJIA      8645   8616   8547   8518   8449
COMPX     1509   1500   1493   1484   1477
SPX        933    927    923    917    913
OEX        472    469    467    464    462
QQQ      28.34  28.06  27.91  27.63  27.48

The indices traded lower today, gapping down at the open,
bouncing from the lows to a lower high, and then hiccupping to
close just above their lows of the day.  There was some dramatic
action in the treasury markets as the effects of this week's
record note action were felt, with five year notes getting sold
off aggressively while tens and thirties were bought.

The fed added a moderate 2.75B net in overnight repurchase
agreements, ignoring the routine 28 day repo that we've come to
expect every Thursday.

Volatility was slightly higher, with the VIX dropping 0.02 to
close at 23.69, QQV +.23 to 27.86 and VXN +1.29 to 33.29.  The
put to call ratio saw its widest swings in the morning, but
persisted in the mid .90s through the afternoon to close at .98.
Overall volume was lighter than yesterday but respectable, with
1.66B NYSE shares and 1.58B COMPX shares traded.

The US Dollar Index was extremely weak throughout the day on news
of the absence of a rate cut from either the BOE or the ECB this
morning, followed by the improved but dismal initial claims data
for the week.  The USD Index broke to new bear market lows below
95.00, propelling gold to the 350/oz level.

On to the charts:

Daily chart of the INDU




I am not marking up the chart to allow you a clear view of the
moving averages.  We all can see the ascending wedge and the
potential for a downside break starting now.  First off, there's
a clear sell signal on the stochastics, rolling from deep in
overbought.  The slow MacD has flatlined at the top of its range,
also in overbought, and it will take little downside from here to
print a big sell signal on that oscillator as well.  The daily
candle is the longest we've see in 3 days, and it's to the
downside, and it follows a spinning top.  Any more selling today
and I'd be calling it a bearish engulfing with confidence, but
there wasn't, so I won't.  On the other hand, the 5 dma has not
crossed the 13 dma, which latter moving average provided clear
support on today's decline.  Lastly, the volume was light,
showing a lack of commitment on the part of sellers.  As you
know, I believe that low volume is bearish, but if this is a
genuine bear wedge breakout to the downside, I'll expect to see a
pickup in volume as sellers jump onto the move.

Daily Chart of the SPX




The same applies to the SPX.  Note that the volume was relatively
higher on the SPX than on the narrower INDU, which shows a
broader commitment to the sell side in the broader market.  The
oscillators are in the same configuration here.  The low VIX
close today tells me that the options market is expecting a
bounce at this level, and respect for the 13 dma and the lower
ascending trendline.  If they're right, we'll see a move higher
tomorrow.  If not, the bear wedge projects potentially to the
March lows, although I expect a great deal of attempts to "buy
the dips" on the way down.

Daily chart of the OEX




There's nothing to add on the OEX, except that the day's candle
did the most damage to the 13 dma.  The S&P 100 should "lead" the
broader SPX, and with the volume relatively higher than the SPX
and INDU, and the deepest penetration of the 13 dma, it looks
like the OEX wants to lead its peers downward.

Daily chart of the COMPX




The COMPX printed a gravestone doji, closing the day near the
bottom of its range, with the rest of the day's action forming a
"blowoff" top or candle shadow.  The COMPX has been stronger than
the INDU/OEX/SPX throughout the rally, and we see this reflected
in the relatively higher close above the 13 dma and the absence
of a kiss on the MacD.  However, the gravestone doji, as the name
implies, is anything but bullish.

Chart of the QQQ




The QQQ is the most bearish of the bunch, printing a "deeper"
gravestone doji and closing at its low of the day, right on the
13 dma and with volume actually exceeding yesterday's volume.
This is the one chart that appears to have decisively violated
its lower ascending trendline on a closing basis, and did so on
expanding volume.  The stochastic oscillator has given a sell
signal with a bearish cross from overbought, while the slower
MacD has yet to kiss.  Strong support should appear at 27.30.

The leading weakness in the QQQ should have bullish traders
tightening their stops and getting ready to hit the exits if the
13 dma's depicted by the red moving average lines on each chart
get taken out with authority tomorrow.  For those who have been
watching and following the trendlines setting out the ascending
wedge on these charts for the past month, the 13 dmas represent
levels that, if breached, represent a downside breakout as
implied by the bearish ascending wedge formation.  If you've been
patiently waiting to get short, that would be a respectable
trigger to use both for the entry, and as a reference point from
which to set your stops. The indices are at critical levels with
the volatily indices (VIX/VXN/QQV) at levels commensurate with a
swing top, and any further downside in the indices will imply
that the last significant wave up has terminated.


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


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

One More Day?
- James Brown

Investor sentiment, despite a couple of down days in the broader
markets, still feels bullish.  Bulls are almost eager for the dip
to occur, especially those still waiting on the sidelines so they
can hop on for the next leg higher.  What they don't realize is
that the volatility indices continue to flash big warning signs
across our monitors.

A quick look at the bullish percent indicators, which tell us how
many stocks are on a buy signal in a given index, are looking
pretty long in the tooth.  The NASDAQ-100 bullish percent has
risen to 77 and is essentially "overbought".  Yes, it can keep
going higher and in December of last year it reached 83 before
falling back.  Or as Jeff likes to describe it, the bulls turned
the ball over to the bears.  We've mentioned before that 70 is
usually the ceiling or overbought level and a sign that the rally
could be approaching its end.  As men, we like to think of the
bulls "scoring" a touchdown when the bullish percent reaches 70.
As you know, after a team scores, they go for the extra point and
then they kick the ball for the other team to receive.  From the
looks of it, the NDX has scored and they're working on the
"extra" point.  Meanwhile the bullish percents for the Dow
Industrials, the S&P 100 and the S&P 500 are all in the mid-60's
and getting close to that goal line.  While this could mean that
we have farther to go for the bulls it also means that the bears
are not far from getting their turn to score.  The bullish
percent chart for the S&P 500 is showing overhead resistance at
65, so it may never reach the 70 level.

The market internals today were also bearish, which is to be
expected given the closing numbers.  The advance/decline line was
not too bad and the 52-week highs are still crushing new lows but
the up and down volume was pretty strongly in favor of the bears.
Down volume was three times up on the NYSE and four times up on
the NASDAQ.  I've got a feeling that we'll see some more profit
taking tomorrow as we head into the weekend.  The key will be to
watch what stocks hold at support and which breakdown.  As long
as the markets can keep the selling this mild then I'm all for
one more day.


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

Market Averages

DJIA ($INDU)

52-week High: 10353
52-week Low :  7197
Current     :  8491

Moving Averages:
(Simple)

 10-dma: 8497
 50-dma: 8190
200-dma: 8319



S&P 500 ($SPX)

52-week High: 1107
52-week Low :  768
Current     :  920

Moving Averages:
(Simple)

 10-dma:  921
 50-dma:  874
200-dma:  881



Nasdaq-100 ($NDX)

52-week High: 1351
52-week Low :  795
Current     : 1119

Moving Averages:
(Simple)

 10-dma: 1121
 50-dma: 1055
200-dma:  998



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

It's a little odd to see the markets slipping but the volatility
indices remain stuck near their lows.  We've all noted how the
selling feels pretty mild, which probably contributes to trader's
complacency and lack of fear.  Hence, no rise in volatility.

CBOE Market Volatility Index (VIX) = 23.69 -0.02
Nasdaq-100 Volatility Index  (VXN) = 33.29 +1.29

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.98        575,678       562,427
Equity Only    0.84        451,613       380,852
OEX            1.46         23,010        33,702
QQQ            7.05         20,879       147,160


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

Bullish Percent Data

           Current   Change   Status
NYSE          55.9    + 0     Bull Confirmed
NASDAQ-100    77.0    + 1     Bull Confirmed
Dow Indust.   63.3    + 0     Bull Confirmed
S&P 500       63.4    + 0     Bull Confirmed
S&P 100       64.0    + 0     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  1.21
10-Day Arms Index  1.18
21-Day Arms Index  1.15
55-Day Arms Index  1.30


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

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

Market Internals

            -NYSE-   -NASDAQ-
Advancers    1218      1169
Decliners    1620      1836

New Highs     150       134
New Lows       14        17

Up Volume    412M      285M
Down Vol.   1204M     1270M

Total Vol.  1652M     1576M

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


NASDAQ-100

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

DOW JONES INDUSTRIAL

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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WEEKLY MANAGER MICROSCOPE
*************************

Frederick L. Reynolds: Reynolds Fund (REYFX)

This pro-growth style fund has scorched the competition over the
trailing 4-week, 3-month and YTD periods through May 7, 2003 and
may be of interest to risk takers.  It's one of several "growth"
oriented funds to lead the performance charts in recent weeks as
investors start to look to an eventual post-war recovery, though
that may come later rather than sooner.  Growth style funds have
taken a beating over the past three years, and like high current
yield funds, have bounced back sharply in this year's stock rise.

Mr. Reynolds' bio reads that he has been the sole proprietor of
Reynolds Capital Management since 1985.  Previously, he spent 14
years as a general partner with the investment firm of Robertson,
Coleman and Siebal/Montgomery Securities, and four years as an
analyst and portfolio manager with American Express.

The Reynolds Funds (REYFX) began operations on Sep. 30, 1999 and
has less than five years of history.  It sports a lousy trailing
3-year performance record, but 3-year records can change quickly,
turning yesterday's dogs into tomorrow's winners, and vica versa.
The fund's 32.1% annualized loss over the past three years ranks
in the bottom decile of the Morningstar large-growth category but
its YTD 2003 return of 28.2% ranks in the top 1% of the large-cap
growth category.

The Reynolds Fund is one of five funds offered by Reynolds Funds.
It's offered on a no-load basis but has a relatively high expense
ratio of 1.90%, per Morningstar.  Another website shows 2.10% for
the expense ratio.  The fund's expense ratio may come down as the
fund enjoys some success (presuming it does) and net assets grow.
Currently, the Reynolds Fund has about $11 million in assets, per
Morningstar.  For complete information on the Reynolds Fund or to
download a prospectus, go the www.reynoldsfunds.com website.  The
fund is available in some brokerage networks.

Manager Style/Strategy

The Reynolds Fund is a general U.S. stock fund and is intended to
serve as a core investment holding.  While Reynolds may invest in
common stocks of companies of all types and sizes, he will invest
primarily in high-quality, U.S.-headquartered companies, offering
significant earnings growth potential.  Hence, the fund primarily
invests in "growth" stocks, but may also invest in "value" stocks
as conditions warrant.

According to Lipper, the Reynolds Fund is a "large-cap core" fund
but in Morningstar's system, it's put into the "large-cap growth"
category.  Moreover, the fund currently falls into the mid-growth
style box.  So, it would appear that Reynolds has become a little
more aggressive lately in his portfolio structure compared to the
fund's trailing 3-year average investment style (large-core).  As
the fund has shifted from blend to growth in style and from large
to mid in capital sector, it has increased potential risk, but at
the same time, it has raised the fund's potential reward.  He has
structured the Reynolds Fund to maximize return in a "growth" led
market advance.

According to Morningstar, Reynolds had 100% of assets invested in
common stocks, with 89.4% in domestic stocks and 10.6% in foreign
stocks.  The fund possessed an average market cap of $9.8 billion
and an average forward P/E of 24.9 for a mid-cap growth style box
designation at quarter-end.  However, the term multi-cap may be a
better description of the fund's capitalization structure.  As of
March 31, 2003, around 23.5% of assets were invested in giant-cap
stocks; 28.5% in large-cap stocks; 28.3% in mid-cap stocks; 13.4%
in small-cap stocks; and 5.7% in micro-cap stocks.  So, Reynolds'
fund offers much broader exposure to the total U.S. stock market.

Compared with S&P 500 index and its category peers, Reynolds Fund
was overweighted in information-related sectors, such as software
hardware and telecommunications, and was underweighted in service
and manufacturing-related sectors.  Information sectors comprised
two-thirds of fund assets at quarter-end, per Morningstar.  While
the fund's assets are spread across multiple capital sectors, its
large sector bets can result in higher volatility -- good or bad.
This year, Reynolds' sector bets have paid off well, but in prior
periods they contributed to greater volatility and downside risk.

In addition to the fund's high risk relative to peers, it sports
a high expense ratio for a no-load offering in this category per
Morningstar.  Funds with greater expenses generally underperform
those with lower expenses.  That does not mean the Reynolds Fund
will underperform its peers over the long haul, but it does make
the task more difficult for Frederick Reynolds and make him more
likely to have to take on more risk in pursuit of higher returns.
He has to earn a greater rate of return on his stock investments
over time to compensate for the fund's higher relative expenses.

Manager Performance

Since the Reynolds Fund was launched near the end of the 1990's
bull market, most of its investment history has been during the
market correction that occurred between 2000 and 2002.  It also
was a period of time that "growth" stocks and styles lost favor
with investors.  No sooner had it been launched, then its style
went out of favor in a big way.  If you assume that "high" risk
funds lose more in market downturns that "low" risk funds, then
you can understand why the Reynolds Fund has lost an average of
32.1% a year for the past three years, according to Morningstar.

While large-cap growth funds generally produced poor investment
results over the prior 36 months, Reynolds' annualized loss was
among the worst in the category, ranking in the 97th percentile.

If you believe that the higher stocks go, the harder they fall,
then it makes sense to also believe that the harder funds fall,
the higher they may go.  Since December 31, 2002, Reynolds Fund
has risen in value by 28.2%, ranking in the top 1% of the large
growth category, per Morningstar.  That includes a 3-month gain
of 37.3%, also ranking in the 1st percentile of the large growth
category.

A closer look at the fund's top 25 holdings at March 31 reveals
that a number of top holdings have risen more than 50% on a YTD
basis in 2003.  EMC, Network Appliance, Nortel Networks, Citrix
Systems and Verisign are all up over 50% this year.  So when he
gets it correct, Reynolds' sector bets can reap big rewards for
shareholders.

Conclusion

With its high risk and expense, the Reynolds Fund has two tough
hurdles to overcome to receive a better Morningstar star rating.
Currently, the fund sports a 3-year rating of only 1 star based
on "low" return and "high" risk relative to category peers.  As
we have stated, however, most of that comes during a correction
period that saw information and technology stocks get pummeled.

Now that these stocks are bouncing back in 2003, Reynolds' fund
is quickly making up ground.  "Risk-hearty" investors seeking a
"hot" stock fund may want to have a further look.  Conservative
stock investors may want to pass on this fund, or at least wait
until the fund possesses a longer track record.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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The Option Investor Newsletter                 Thursday 05-08-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

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


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

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


CALLS:
*****

SLM Corp. - SLM - close: 110.97 change: -2.45 stop: 111.50

Earlier this week, our SLM play was looking like a ringer to
test its recent highs near $117, especially with the breakout in
the Banking index (BKX.X) over the $800 level.  The stock
stalled out near the $115 level and pulled back to find support
on Wednesday near the $113 level.  But today's session was not
kind to the stock, with the bears extracting more than a 2%
loss, as the BKX gave up the $800 level.  We had set our stop
just below the 50-dma ($111.50), expecting that level to provide
support as it did last week.  Alas, it wasn't to be and SLM
dropped right through that level, ending the day just above its
intraday low.  Clearly with this bearish price action and the
violated stop, we're dropping SLM tonight.

Picked on May 1st at    $112.18
Change since picked:      -1.21
Earnings Date          07/17/03 (unconfirmed)
Average Daily Volume = 902 K
Chart =


PUTS:
*****

Hovnanian Ent. - HOV - close: 41.63 change: -0.14 stop: 41.00

That's precisely what triggers are for!  We initiated coverage
of HOV due to its apparent top near $41 and the bearish
reception on Tuesday of news that its orders for new homes were
up 16%.  Apparently it was just a one-day delay, as the stock
sky-rocketed on Wednesday, closing well above our $41 stop in
the process of moving to a new all-time high.  We had set a
trigger on the play at $38.40, which was never triggered, so
fortunately there was no harm done.  Since it was never
triggered, there was never an entry signal given, and we can
discard HOV as a failed play.  Now we can focus our attention
elsewhere.

Picked on May 6th at    $39.21
Change since picked:     +2.42
Earnings Date         05/26/03 (unconfirmed)
Average Daily Volume = 438 K
Chart =


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

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

CALLS    LAST     Mon    Tue   Wed   Thu

ADTN     43.61   0.33  -0.03 -0.08  0.24 Decent Relative Strength
IBM      86.05  -0.68   0.99 -0.27 -0.63 Watch for a dip
KLAC     41.06   0.15   0.66 -0.55 -0.98 Looking for a bounce
MEDI     34.18  -0.30  -0.29 -0.58 -0.32 Long-term, no update
SLM     110.97   0.06  -1.24 -0.48 -2.45 DROP, broke 50-dma


PUTS

AIG      55.46  -0.18  -0.08 -0.85 -1.09 NEW, failed rally
GM       35.78  -0.26   0.49  0.08 -0.30 Churning sideways
GS       74.06  -0.11   0.71  0.78 -3.14 NEW, broke support
HOV      41.63   0.07  -0.86  2.56 -0.14 DROP, untriggered
KSS      53.25  -1.15   1.69  0.65 -3.25 Bad Same-store sales


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

ADTRAN, Inc. - ADTN - close: 43.61 change: +0.24 stop: 42.00*new*

As mentioned on Tuesday, our ADTN play looked like it was due
for a bit of profit taking and sure enough that occurred over
the past couple days.  We wanted to see how deep the dip would
be before committing to new positions, and judging by the way
buyers stepped up at the $43 level on Thursday, that seems to be
support.  The stock rebounded from that level early in the day
and slowly worked its way back towards the $44-45 resistance
zone, despite the lack of a bid in the rest of the Technology
arena.  New positions on look attractive on another rebound from
the $43 level, so long as the NASDAQ doesn't continue to fall.
We're inching our stop up to the $42 level, as the stock should
continue to be supported by the 10-dma (currently $41.98).

Picked on April 29th at  $40.70
Change since picked:      +2.91
Earnings Date          07/15/03 (unconfirmed)
Average Daily Volume = 789 K
Chart =


---

Intl Business Mach - IBM - cls: 86.05 chg: -0.63 stop: 84.00

At the end of the day 29 out of 30 Dow components closed in the
red.  Yet despite the widespread weakness the selling pressure
really wasn't all that bad.  IBM lost only 63 cents and remains
above the $86 mark.  It does look like the rally is getting
tired.  Obviously, the last two sessions the bulls have taken a
break but the bears have not gathered enough momentum to force
much of a retreat.  We're actually a little surprised.  The EDS
earnings report on Wednesday was not positive.  While it could be
speculated that IBM is stealing market share from EDS in the
services-consulting arena, the weakness in EDS should at least
cause some doubt in IBM investors.  Today's reaction in IBM
doesn't look like fear.  Considering that tomorrow is the end of
the week we'd suggest a wait and see approach to any new
positions.  Sit back and watch for IBM to dip to the $84 or $85
level.  If it does and bounces, then long positions might be
considered.  However, a close under $84.00 and we're going to get
out.  Should that occur then IBM may be headed for a retest of
recent lows if not its simple 200-dma.

Picked on May 4th at $87.37
Change since picked:  -1.32
Earnings Date      04/14/03 (confirmed)
Average Daily Volume = 8.2 Million
Chart =


---

KLA-Tencor - KLAC - close: 41.06 change: -0.98 stop: 39.95

Yuck!  The reversal in the SOX, while not complete, does not
inspire new money.  The chip index posted another decline, almost
2%, on top of Wednesday's drop back under the 350 level.  Shares
of KLAC followed suit and have pulled back on profit taking.  If
one were just looking at the chart of KLAC then a pull back and
bounce at $40 after its recent rally would seem reasonable.  We
still expect that to occur but not due to recentcomments by
KLAC's CFO.  The company presented at the JPM tech conference
yesterday and KLAC's CFO told analysts that sales are about even
with last quarter.  We know more than half the S&P 500 has warned
about the second quarter but chips are supposed to be leaders
here and flat revenues are not going to do it.  KLAC's CFO said
the company remains "cautious" and would not speculate on when
business would improve.  The future for this play depends on
bulls keeping the hope alive and buying any dip to $40.  We would
not recommend new positions until we saw that bounce.  Until then
keep an eye on the SOX.  The group could continue to pull back to
the 320 or 325 level before rebounding.  Bulls would hope for the
latter as it would be a new higher low for the $SOX.

Picked on May 4th at $42.15
Change since picked:  -1.09
Earnings Date      04/23/03 (confirmed)
Average Daily Volume = 11.4 Million
Chart =



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

None


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

General Motors - GM - close: 35.78 change: -0.30 stop: 38.10

With the consistent upward trend in the broad market, we were
looking for our GM play to continue higher this week and give us
an entry in the $37.00-37.50 area.  Unfortunately, we didn't get
that lucky and Tuesday's intraday high of $36.75 seems to be all
the bulls can muster.  Despite this lack of strength, GM is
finding support at the 20-dma (currently $35.84), which seemed
to just be starting to give way at the close today.  With daily
Stochastics starting to roll over without entering overbought,
we may have to settle for taking an entry on a rollover in the
$36.00-36.50 area on Friday.  Traders looking to enter on
weakness can use a break below $35.50 to enter although those
with a more cautious style may want to wait for the $35 level to
give way.  Given the slow-moving nature of GM, we'll likely
treat it as a long-term play starting this weekend, updating it
only when necessary.  Our stop remains at $38.10, just above
both the descending trendline and the 200-dma.

Picked on May 4th at    $35.80
Change since picked:     -0.02
Earnings Date         07/15/03 (confirmed)
Average Daily Volume = 5.10 mln
Chart =


---

Kohl's Corp. - KSS - close: 53.25 change: -3.25 stop: 56.50*new*

It's about time.  This is the third time since we began coverage
of KSS that the stock has breached the $55 support level, but
this time it looks like the real deal.  On each of the prior two
violations of the $55 level, the stock responded with a quick
and strong rebound back to support, albeit at a lower level than
the time before.  But Thursday's price action was different,
with KSS falling to close just above the $53 level, right at the
low of the day.  This is also the stock's first close under $54
since mid-March, and it looks like the stock is well on its way
to achieving our first downside target at $51-52.  Motivating
Thursday's steep slide was the company's disappointing same
store sales report for April, which showed a 4.1% decline.
Trading down to $51 will fill the 3/13 gap and could lead to a
reaction bounce.  That means conservative traders may want to
harvest some gains near $51.  Those willing to hold on a bit
longer will be targeting a drop to stronger support at $50.  Now
that we've gotten what looks like a solid breakdown, new entries
should work nicely on a failed rally below the $55 level, with
today's gap ($56.50-55.05) and the 50-dma $55.46 providing solid
overhead resistance.  Due to the stock's recent volatile action,
we're still being cautious with our stop, lowering it to $56.50
(Wednesday's close) tonight.  Remember, KSS has earnings
scheduled for next Thursday, so there's only one week left to
play and get out before that news event.

Picked on April 27th at $55.02
Change since picked:     -1.77
Earnings Date         05/15/03 (confirmed)
Average Daily Volume = 3.70 mln
Chart =



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

American Intl Group - AIG - cls: 55.46 chg: -1.09 stop: $58.00

Company Description:
American International Group, Inc. (AIG) is the world's leading
international insurance and financial services organization, with
operations in approximately 130 countries and jurisdictions. AIG
member companies serve commercial, institutional and individual
customers through the most extensive worldwide property-casualty
and life insurance networks of any insurer. In the United States,
AIG is the largest underwriter of commercial and industrial
insurance and a top-ranked life insurer through AIG American
General. AIG's global businesses also include financial services,
retirement savings and asset management. AIG's financial services
businesses include aircraft leasing, financial products, trading
and market making. AIG's growing global consumer finance business
is led in the United States by American General Finance. AIG also
has one of the largest U.S. retirement savings businesses through
AIG SunAmerica and AIG VALIC, and is a leader in asset management
for the individual and institutional markets, with specialized
investment management capabilities in equities, fixed income,
alternative investments and real estate. AIG's common stock is
listed on the New York Stock Exchange, as well as the stock
exchanges in London, Paris, Switzerland and Tokyo.
(source: company press release)

Why We Like It:
Going short at failed resistance is the most tempting and least
threatening opportunity for a bear.  Shares of AIG are presenting
just such an opportunity.  Now that the markets have started to
pull back a bit in profit taking traders are going to be hunting
for weak stocks that have room to fall.  AIG could be one of
them.  The stock had rallied right to its 200-dma ahead of its
April 24th earnings report and then it came crashing right back
down after the report, probably due to one of the earliest
announcements by an American company about how SARS might affect
business.  Okay, "crashed" maybe an exaggeration but shares did
drop strongly and have spent the last two weeks in a vain attempt
to break above its descending 200-dma.  The recent market
weakness, albeit mild, have seen shares of AIG extend their
failed rally pull back.

AIG earns almost 30 percent of its revenues from Asia and the
ongoing SARS threat will most certainly affect their Q2 earnings.
Even if the SARS influence is reduced the perception that SARS
could affect their earnings results is all it takes to have
investors hitting the sell button.  The company has already
issued a statement that SARS will prevent its agents from
visiting prospective customers in the region.  To exacerbate the
issue AIG already has a small number of agents under quarantine
and at least one has been confirmed as a SARS patient.

Potentially contributing to AIG's weakness is the IUX insurance
index.  The IUX has been trading higher in a relatively narrow
channel since early April.  We did notice it spike up and back
down on AIG's earnings report but the index kept climbing while
AIG went sideways after investors digested AIG's earnings
numbers.  The recent market weakness has pushed the IUX through
the bottom of its narrow channel and the index rests precariously
above its simple 200-dma.  We would watch both the IUX and AIG
for weakness.  A move under the 200-dma for the IUX or a move
under $55 for AIG might be a precursor for the other.  Chart
technicians will also note that the daily MACD and stochastics
for AIG are rolling over from oversold.  We also note that AIG's
weekly chart is showing the stock at the top of a multi-month
descending channel (see image below).  More aggressive traders
can initiate a short position here but we're going to use a
trigger under $55.00 (actually $54.94) to launch us into the
play.  Our initial stop will be $58.00, although $58.35 would be
just above recent highs.  Keep in mind that AIG's chairman will
be speaking at the Goldman Sachs Financial conference on May 13th
and any positive comments could affect our play poorly.

Suggested Options:
Stocks tend to go down faster than they go up so our focus will
be on short-term options.  May's are out of the question except
for all but the most nimble traders.  Considering that there are
only six trading days left for May options makes them extremely
risky.  June and August appear to be our best bets.  FYI: we did
notice very big volume and open interest in the August 45 puts.

BUY PUT JUN 55 AIG-RK OI=4574 at $2.15 SL=1.00
BUY PUT JUN 50 AIG-RJ OI=6178 at $0.70 SL=0.00
BUY PUT AUG 50 AIG-TJ OI=5347 at $1.75 SL=0.80

Annotated Chart:



Picked on May Xth at $00.00
Change since picked:  -0.00
Earnings Date      04/24/03 (confirmed)
Average Daily Volume = 7.2 Million

---

Goldman Sachs Grp. - GS - close: 74.06 change: -3.14 stop: 78.25

Company Description:
The Goldman Sachs Group is a global investment banking and
securities firm that provides a wide range of services worldwide
to a substantial and diversified client base that includes
corporations, financial institutions, governments and high net-
worth individuals. The company provides investment banking,
which includes financial advisory and underwriting, and trading
and principal investments, which includes fixed income, currency
and commodities, equities and principal investments.  GS
recently completed the acquisition of Spear, Leeds & Kellog,
which is engaged in securities clearing, execution and market
making, both floor-based and off-floor.

Why we like it:
We've been watching the Brokerage group (XBD.X), looking for
some sign of weakness to confirm what appear to be dismal
developments on the fundamental front.  Trading volumes are
down, investment banking deals are rare as hen's teeth and there
is the unspoken expectation that there are going to be a flood
of class-action lawsuits against these companies in the wake of
the recent settlement with U.S. regulators, where the word
"fraud" was used.  The problem with a bearish play in this
sector has been the fact that there just hasn't been any sign of
price weakness, as earlier this week, the XBD index pushed
through its long-term descending trendline ($450) and briefly
traded above the $460 level for the first time since early
December.  But that resistance proved too much for the bulls and
the some serious selling came into the sector on Thursday,
driving the index back under that descending trendline.

We may not have seen THE top for this group, but stocks like our
new play GS suffered some pretty heavy selling today and it
looks like the top is in.  After flirting with its own
descending trendline (currently $77.75) for more than 2 weeks,
the stock plunged more than 4%, coming to rest right on pivotal
support at $74.  More importantly, GS broke down out of its 2-
month ascending channel when it traded under $76, and based on
the heavy selling volume (75% above the ADV), this is a serious
breakdown.  Daily Stochastics are starting to look weak again,
and the last two cycles up to overbought generated bearish
divergence with higher price highs and lower Stochastics highs,
adding to the bearish outlook for GS.  Our initial target will
be in the $70.00-71.50 area.  This defines the early April gap,
and the top of that gap also happens to be the site of the
converging 50-dma ($71.55) and 200-dma ($71.73).  That target
area will be the first point at which we'll want to consider
harvesting gains and then re-evaluate to see if there appears to
be more downside in store.

When channels like this break, there is usually a bounce to test
the bottom of the channel before the decline really gets moving,
so our ideal situation would be to enter on a failed rebound
near the $76 level.  Of course, we need to prepare for the
possibility that GS breaks lower and never comes back to test
that level, so momentum entries would make sense on a breakdown
under the $74 level, Thursday's intraday low.  Just to prepare
for what could be some volatile action in the early going in GS,
we're setting a wide stop at $78.25, which is just above that
descending trendline.  Traders that enter on a breakdown under
$74 will most likely want to use a stop at $76.25, just above
the bottom of the broken channel.

Suggested Options:
Short-term traders will want to focus on the June 75 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 70 Put or even the July 70 put, which
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-75 GS-RO OI=1606 at $3.40 SL=1.75
BUY PUT JUN-70 GS-RN OI=2138 at $1.50 SL=0.75
BUY PUT JUL-70 GS-SN OI=4256 at $2.45 SL=1.25

Annotated Chart of GS:






Picked on May 8th at    $74.06
Change since picked:     +0.00
Earnings Date         06/19/03 (unconfirmed)
Average Daily Volume = 4.17 mln


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The Option Investor Newsletter                 Thursday 05-08-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: PUT - AIG
Traders Corner: Prepare Thyself – Expiration Is Near And Action Is
Imminent


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

American Intl Group - AIG - cls: 55.46 chg: -1.09 stop: $58.00

Company Description:
American International Group, Inc. (AIG) is the world's leading
international insurance and financial services organization, with
operations in approximately 130 countries and jurisdictions. AIG
member companies serve commercial, institutional and individual
customers through the most extensive worldwide property-casualty
and life insurance networks of any insurer. In the United States,
AIG is the largest underwriter of commercial and industrial
insurance and a top-ranked life insurer through AIG American
General. AIG's global businesses also include financial services,
retirement savings and asset management. AIG's financial services
businesses include aircraft leasing, financial products, trading
and market making. AIG's growing global consumer finance business
is led in the United States by American General Finance. AIG also
has one of the largest U.S. retirement savings businesses through
AIG SunAmerica and AIG VALIC, and is a leader in asset management
for the individual and institutional markets, with specialized
investment management capabilities in equities, fixed income,
alternative investments and real estate. AIG's common stock is
listed on the New York Stock Exchange, as well as the stock
exchanges in London, Paris, Switzerland and Tokyo.
(source: company press release)

Why We Like It:
Going short at failed resistance is the most tempting and least
threatening opportunity for a bear.  Shares of AIG are presenting
just such an opportunity.  Now that the markets have started to
pull back a bit in profit taking traders are going to be hunting
for weak stocks that have room to fall.  AIG could be one of
them.  The stock had rallied right to its 200-dma ahead of its
April 24th earnings report and then it came crashing right back
down after the report, probably due to one of the earliest
announcements by an American company about how SARS might affect
business.  Okay, "crashed" maybe an exaggeration but shares did
drop strongly and have spent the last two weeks in a vain attempt
to break above its descending 200-dma.  The recent market
weakness, albeit mild, have seen shares of AIG extend their
failed rally pull back.

AIG earns almost 30 percent of its revenues from Asia and the
ongoing SARS threat will most certainly affect their Q2 earnings.
Even if the SARS influence is reduced the perception that SARS
could affect their earnings results is all it takes to have
investors hitting the sell button.  The company has already
issued a statement that SARS will prevent its agents from
visiting prospective customers in the region.  To exacerbate the
issue AIG already has a small number of agents under quarantine
and at least one has been confirmed as a SARS patient.

Potentially contributing to AIG's weakness is the IUX insurance
index.  The IUX has been trading higher in a relatively narrow
channel since early April.  We did notice it spike up and back
down on AIG's earnings report but the index kept climbing while
AIG went sideways after investors digested AIG's earnings
numbers.  The recent market weakness has pushed the IUX through
the bottom of its narrow channel and the index rests precariously
above its simple 200-dma.  We would watch both the IUX and AIG
for weakness.  A move under the 200-dma for the IUX or a move
under $55 for AIG might be a precursor for the other.  Chart
technicians will also note that the daily MACD and stochastics
for AIG are rolling over from oversold.  We also note that AIG's
weekly chart is showing the stock at the top of a multi-month
descending channel (see image below).  More aggressive traders
can initiate a short position here but we're going to use a
trigger under $55.00 (actually $54.94) to launch us into the
play.  Our initial stop will be $58.00, although $58.35 would be
just above recent highs.  Keep in mind that AIG's chairman will
be speaking at the Goldman Sachs Financial conference on May 13th
and any positive comments could affect our play poorly.

Suggested Options:
Stocks tend to go down faster than they go up so our focus will
be on short-term options.  May's are out of the question except
for all but the most nimble traders.  Considering that there are
only six trading days left for May options makes them extremely
risky.  June and August appear to be our best bets.  FYI: we did
notice very big volume and open interest in the August 45 puts.

BUY PUT JUN 55 AIG-RK OI=4574 at $2.15 SL=1.00
BUY PUT JUN 50 AIG-RJ OI=6178 at $0.70 SL=0.00
BUY PUT AUG 50 AIG-TJ OI=5347 at $1.75 SL=0.80

Annotated Chart:




Picked on May Xth at $00.00
Change since picked:  -0.00
Earnings Date      04/24/03 (confirmed)
Average Daily Volume = 7.2 Million
Chart link:


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

Prepare Thyself – Expiration Is Near And Action Is Imminent
By Mike Parnos, Investing With Attitude

At the CPTI we advocate a laid back trading style.  Many traders
are used to being considerably more active.  The transition from
active to laid back has created a strange phenomenon.  We how have
a bevy of passive-aggressive couch potatoes.

Be careful how you channel this aggression.  CPTI students, who
strive to trade for a living, have to have a certain temperament
to be successful.  "Type A" personalities typically don't do well
as traders.  They're better off having a career holding a leaf-
blower in one hand and a week-whacker in the other.  Then they can
freely take out their aggressions on some unsuspecting hedge or a
field of dandelions – and get paid for it!

CPTI students, who have wisely been repressing their urge to
trade, will have their opportunity to pull the trigger on
expiration day.  Hopefully, they will be been rewarded for their
self-discipline.

I've received a number of emails about dealing with short options
as expiration approaches.  As the market makers purposefully move
stocks toward heavy open interest strikes, in today's column we'll
address this concern.
______________________________________________________________

Mike,
I really like your trading philosophy.  I wanted to ask you about
exiting short option positions that are very near expiration. Many
of your strategies involve shorting an option with another long
option as protection. Let's say everything is going according to
plan and the options look to be expiring worthless on option
expiration day. As we get closer to the market close, the
underlying stock or index is trading around our short option's
strike price (a little bit in the money then out of the money,
etc).

My first question is: If the short option is 10-15 cents in the
money as the market is approaching the close of trading would you
buy it back for fear of assignment? I think my brokerage firm
automatically exercises long options for me if it's 3/8 of a point
in the money. Should that be used as a threshold for buying back
the short option near expiration?

Response:
When a short option is trading very near the strike price on
expiration day, it's a good idea to buy it back for a nickel or
dime.  Strange things can (and often do) happen on the last day
and in the last hour before expiration.  For example, if you're
short a $30 put and the stock is trading at $30.10, there is still
a possibility that you will be assigned.  You might want to throw
an order out there early in the day to buy back the short put at a
nominal rate.  Don't wait for the last 15 minutes.  Too much
mierde is going on in the last 15 minutes

If the underlying is trading anywhere below $30, you will likely
be assigned.  Most brokers will have a figure they use at which
you would automatically be assigned.  Many use $.75 in the money.
For peace of mind, spend the nickel or dime.  This is why market
makers try to manipulate the stock towards a strike price -- to
generate more transactions -- and it works!  Market makers are a
lot like having a mother-in-law living in your home.  You have to
pick your battles.  Sometimes it pays to fight with her.  Other
times, you're better off just going with the flow and staying in
the will.
______________________________________________________________

My second question is a result of the fact that I've never
exercised and option or been assigned on a short option. If I were
assigned an option (let's use a call option that is $5 in the
money at expiration as the example), would I have to come up with
the funds to purchase the underlying shares?  Or would the
brokerage be able to do a net exercise and just take the loss out
of my account?

Regarding being assigned an option that's $5 in the money.  First,
it is very rare that a stock would be assigned unless all of the
time value is gone from the put option.  If you are assigned, you
will have to have the funds in your account to purchase the
stock.  If you have a margin account, you'd likely only need 50%
of the cash.  If you have a sufficient amount of other marginable
securities in your account, they could conceivably cover the
purchase of the stock if your brokerage firm allows your
securities to provide buying power.

If you don't have the cash or buying power, you will get a Reg T
margin call and will have three days to bring in money to cover
the purchase.  This is why you should not let your short options
go unattended -- particularly if it's they're in the money and
it's near expiration (when time value is at its minimum).  Our
philosophies are "hands off," but not THAT hands off.
______________________________________________________________

May CPTI Portfolio Positions

Position #1 -- SMH Baby Condor.  Thursday's Close: $26.86
SMH is the Semiconductor Holder Trust.  We feel that semiconductor
stocks have moved up a little too far and too fast.  We created a
baby condor by selling the May SMH $25 puts and $27.50 calls.  For
protection, we bought the May $22.50 puts and $30 calls.  The net
credit is $1.05

Our maximum profit range is $25 to $27.50.  We're only exposed for
the 2 1/2 point difference between the strikes ($25/$22.50 or
$27.50/$30) less what we've taken in ($1.05) = $1.45.  Maximum
potential profit is $1,050.

SMH has been bouncing around within the range – but then, that's
what it's supposed to do.  Actually, it traded as high as $27.78.
Our safety range is $23.95 to $28.55.  It's still within the
range.
____________________________________________________________

Position #2 – SPX Iron Condor.  Thursday's Close: 920.27
We believe the market may be a bit extended so we gave it a big
sandbox to play in.  We sold the SPX May 825 puts and the May 950
calls.  Then we bought the SPX May 800 puts and May 975 calls for
protection.  The net credit was $2.95.  Our exposure is a little
more than usual – 25 points less the $2.95 we took in = $22.05.
That's why we're only doing five contracts. Our maximum potential
profit is $1,475.

SPX traded up to 934+ earlier this week.  In the last few days the
market has come down and provided us with a little more cushion.
You can breathe easier, but keep your pink liquid friend handy –
and I'm not talking about a strawberry daiquiri.  I'm talking
about Pepto Bismol.
______________________________________________________________

Position #3 – MSFT Minage-A-Qua – Thursday's Close: $25.75
Microsoft just came out with respectable earnings and
unenthusiastic guidance.  We believe that MSFT will finish at or
around $25.

We sold the May MSFT $25 puts and calls for a credit of $1.80.  We
bought the $27.50 calls and $22.50 puts for protection at a cost
of  $.45 – yielding a net credit of $1.35.  Our maximum profit
occurs if MSFT closes right at $25.  Our profit range is from
$23.65 to $26.35.  Our risk is only $1.15 with the potential to
make $1.35.  Maximum potential profit is $1,350.  We're still in
the profit range with just six trading days left.
_____________________________________________________________

Position #4 – DJX Minage-A-Qua – Thursday's Close: $84.91
The DJX tracks the DOW.  It looks like the DOW is in a minor
uptrend with resistance at $85 and support at $82.   We sold 10
contracts of the May DJX $84 puts and bought the May DJX $80 puts.
Then sold 10 contracts of the May DJX $84 calls and bought the May
DJX $88 calls for a credit of $.80 for a total net credit of
$2.25.

We'll receive our maximum profit if the DOW closes right at 8400.
However, we will be profitable if the DOW closes anywhere between
8175 to 8625.  That's a 450-point range.  The closer it finishes
to 8400, the greater the profit.  Maximum profit potential:
$2,250.  There are five trading days left.  Remember, the DJX is a
European style option that expires on Thursday's close.  Unless
you buy back the option(s), there will be a cash settlement in
your account.  There is no risk of assignment.
______________________________________________________________

A Story About Logic
The scene was a tiny mountain village in a remote section of West
Virginia. An old mountaineer and his young wife were getting a
divorce in the local court. But custody of the children was a
problem. The mother jumped to her feet and protested to the judge
that since she had brought the children into this world, she
should retain custody of them.

The old mountaineer also wanted custody of the children. The judge
asked for his side of the story and, after a long moment of
silence, the mountaineer slowly rose from his chair and replied,
"Judge, when I put a dollar in a candy machine and a candy bar
comes out, does it belong to me or the machine?"
______________________________________________________________

Happy trading! Remember the CPTI credo: May our remote batteries
and self-discipline last forever, but mierde happens. Be prepared!
In trading, as in life, it’s not the cards we’re dealt. It’s how
we play them.

Your questions and comments are always welcome.
Mike Parnos
CPTI Master Strategist and HCP


************************Advertisement*************************
"If you haven't traded options online – you haven't really traded
options," claims author Larry Spears in his new compact guide book:

"7 Steps to Success – Trading Options Online".

Order today and save 25% (only $15) by clicking on PreferredTrade
and clicking on the link to the book on its home page.

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


**********
DISCLAIMER
**********

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


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