Option Investor

Daily Newsletter, Monday, 05/12/2003

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The Option Investor Newsletter                   Monday 05-12-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Another Triple-Digit Day
Futures Wrap: Stampede!
Index Trader Wrap: Mach .97
Weekly Fund Wrap: Mutual Funds Extend YTD Gains
Traders Corner: Planning For The Future(s)

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
05-12-2003                  High    Low     Volume Advance/Decl
DJIA     8726.73 +122.13  8743.47 8569.44   1696 mln  1990/ 869
NASDAQ   1541.40 + 21.25  1544.41 1512.72   1758 mln  1957/1107
S&P 100   477.96 +  5.71   478.83  470.60   totals    3947/1976
S&P 500   945.11 + 11.70   946.84  929.30
RUS 2000  418.20 +  4.67   418.20  412.70
DJ TRANS 2462.18 + 27.34  2496.92 2453.89
VIX        21.42 -  0.62    23.15   21.35
VIXN       32.58 +  0.49    34.17   32.54
Put/Call Ratio 0.76

Another Triple-Digit Day
by James Brown

There they go again!  The bulls came back from the weekend
refreshed and ready to run.  Despite some early morning weakness
the markets took off for another triple digit gain by day's end.
From Thursday's close the DJIA is up 235 points and trading near
the top of its short-term channel (see images below).  The rest
of the market followed suit with many of the major averages at
three or four month new highs.  The Industrials added 122 points
to 8726.  The NASDAQ gained 21 points to close at 1541.  The S&P
500 index added almost 12 points to close at 945, which is
significantly above the previous highs of 930 in January.

Painting the backdrop for this market rally were strong results
in the Far East with the Japanese NIKKEI gaining 69 points to
8221 and the Chinese Hang Seng adding 71 to 9155.  European
markets were mixed with the English FTSE 100 adding 18 to 3987
and the German DAX losing 19 to 2937.  Early in the session both
Gold and Oil futures contracts were gaining ground but investors'
unbridled desire for stocks today had both the shiny metal and
the black gold wilting from intraday highs.

The market's internals show just how badly traders wanted to buy
equities today.  The advance-decline ratio was very positive with
1990 winners to 869 losers on the NYSE and 1957 winners to 1107
losers on the NASDAQ.  It's a non-stop beating for 52-week lows,
which measured a measly 23 compared to 454 new 52-week highs.
More impressive was the up-down volume ratios.  Up volume swamped
down volume by 6 to 1 on the NYSE and 5 to 1 on the NASDAQ.

Most investors, traders, and professionals on Wall Street seem
pretty enthusiastic that stocks have made such a comeback from
their March 2003 lows.  However, the chorus of "stocks have come
too far and need a pull back" or "stocks are over extended and
need to digest gains" is growing louder with each new voice
echoing the same concerns.  Check out the charts below:

Chart of the Dow Jones Industrials:

Chart of the NASDAQ Composite:

Chart of the S&P 500:

Boosting this big gain in the Dow Jones Industrials today were
the three biggest percentage gainers MO, SBC and MCD.  All of
them were up over four percent each today.  Shares of Altria
Group (MO), previously known as Phillip Morris, jumped $1.40 to
close at $33.10, above its simple 50-dma.  The rise was powered
by a positive article in this weekend's Barron's.  Quoting a
Morgan Stanley analyst, Barron's said that MO's stock may have
become "too cheap to ignore".  According to the report shares of
MO trade for less than seven times estimated 2003 profits of
$4.60 a share and ownership offers a dividend yield of more than
8 percent.  The tobacco analyst also suggested that MO's stock
could climb more than 25% by the end of 2003 if the courts
continue to rule in the company's favor and MO re-ignites its
share buyback program.  Last month MO's CEO said the company's
legal issues were "manageable".

The next biggest gainer was SBC Communications, who added 4.09%
or nearly a dollar to close at two and a half month highs and
above its simple 200-dma.  The telecom company was trading higher
after an the state of Illinois passed legislation that allowed
SBC to almost double the rates it could charge competitors for
leasing its local network.  AT&T and other telecoms had been
trying to compete with SBC for local phone customers and this new
piece of legislation will put the brakes on competition.  Of
course SBC argues that the new rule merely brings Illinois closer
inline with the national average for similar services.  Shares of
AT&T (T) another Dow component lost four cents on the session.

Third in the line of big Dow component gainers is McDonalds (MCD)
who closed up 4.03% or 71 cents to $18.29.  The stock has been
following the same rising channel as the markets but it still has
a little room to go before hitting the upper band.  Investors can
be comforted in that MCD is reaching levels not seen since
December of 2002 and this marks another confident close above its
simple 200-dma.  However, the stock is approaching resistance at
$19.50 on its point-and-figure chart so the bulls have their work
cut out for them.

Probably the most influential mover today was Cisco Systems
(CSCO).  No stranger to the spotlight, today shares of CSCO
rallied more than 4.5% to close at $16.67.  CSCO can credit such
a move to an upgrade by Lehman Brothers.  The LEH analyst raised
his rating on the stock from an "equal weight" to an "overweight"
while lifting his price target on shares a buck to $18.00.  All
in all it wasn't a very enthusiastic upgrade as LEH says sales
growth remains "muted" but a strong month in April and
indications that May sales won't be bad are an opportunity for
investors.  Lehman suggested buying shares of CSCO on weakness.

Tomorrow is a pretty important day for retail as the biggest
retailer on the planet, Wal-Mart, is due to announce earnings
before the bell.  Currently, analysts estimate that WMT will turn
in 42-cents a share on revenues of $60.69 billion for the
quarter.  Last year WMT earned 37 cents a share on $55.42 billion
in revenue.  The Bentonville, Arkansas-based behemoth made the
news this morning after stating that Mother's Day sales came in
"below plan".  Despite the bad news the company assured investors
that May would be inline with estimates for a gain of 1% to 3%.
The stock reversed early morning weakness to bounce off the
bottom of its short-term channel.  This strength in WMT coupled
with positive spots in other retailers lifted the RLX retail
index to levels not seen since July 2002.  The sector as a whole
looks very overbought and we could see a "sell-the-news" event
once WMT's report comes out tomorrow.  If WMT doesn't spark any
consolidation then KSS and TGT have a chance later in the week
with their own earnings report.

Tomorrow will see Applied Materials (AMAT) announce after the
bell and any surprises here will surely affect the chip sector.
Odds for some profit taking on Tuesday after the strong two-rally
in the Industrials are big but broader market indices like the
S&P 500 and the small-cap Russell 2000 still have a little bit
more room to the upside before hitting the tops of their
respective channels.  It all depends on how investors react to
WMT's earnings tomorrow, as most of the big economic reports
don't start announcing until Wednesday.


By Jim Brown

      05-12-2003           High     Low
DJIA     8726.73 +122.13  8743.47  8569.44
NASDAQ   1541.40 + 21.25  1544.41  1512.72
S&P 500   945.11 + 11.70   946.84   929.30
NDX      1160.42 + 16.87  1163.75  1133.89
ES03M     944.00 + 11.75   946.75   928.25
NQ03M    1161.00 + 17.50  1166.00  1134.00
YM03M    8696.00 +118.00  8721.00  8546.00

Daily Pivots (rounded to nearest point)
           R2     R1    Pivot   S1     S2
DJIA      8690   8647   8570   8527   8450
COMPX     1534   1527   1513   1507   1493
ES03M      943    937    928    923    914
YQ03M     8667   8623   8548   8504   8429
NQ03M     1166   1155   1135   1123   1103

After 15 minutes of weakness at the open, which seemed like
a lifetime for those trying to decide to go long/short, the
markets headed up and never looked back. Yes there was a
couple of pauses but nothing that could be considered selling.

The Dow actually moved over its long term down trend resistance
at 8700 and the ES broke 938 resistance from last week. For
once the Nasdaq was not the leading index but it did manage
to post a respectable +21 points. The Dow just continues to
add to gains since March and would appear bullet proof on
the surface.

If you look under the hood there was a very clear stop sign
that held it back from making even more gains. The downtrend
line from August crossed the Dow's path at 8740 which was
exactly where the Dow advance stopped. There is also uptrend
resistance at 8740. This dual resistance overcame very strong
internals with advancers beating decliners 6:1 on the NYSE.
The Dow overcame negative performances by MSFT, T, GE, PG and
JNJ. The strongest performers were UTX, MMM, IBM and MO which
received an upgrade today.

The Dow closed without any material selling and less than 20
points from the high of the day. The odds are good that we will
see another attempt on the resistance at the open on Tuesday
but it is going to be a fight. The massive overbought conditions
should be attracting sellers like flies to a picnic. Notice I
said should. The continued rally is surprising everyone including
even the most ardent bulls. There is only one economic report on
Tuesday but the deck is stacked for the rest of the week. If
there is going to be further gains then Tuesday should be the

Dow Chart - Daily

The Nasdaq is far from downtrend resistance but it did reach the
top of the up trend resistance on Monday at 1545. This is very
extended for the Nasdaq and we have not had a retest of the
up trend support since mid April. It is way overdue. The Nasdaq
was not the leading index today and it could be showing a little
less excitement for tech stocks after such big gains. The index
has risk this week from AMAT earnings on Tuesday and Dell on

If we were to get an overdue retest of support it could mean a
drop back to the 1450 range. This would be extreme and without
some really negative news only a minimal threat. The tech bulls
are alive and well and buying every dip.

Nasdaq Chart - Daily

The ES futures came to a dead stop on uptrend resistance at 946
and like the Dow could not break out. The cycle trend is complete
and we can now start looking for the trend to change once again.
We have had the line to line touch in three days of trading and
the cycle trend has been as long as five days twice before. The
risk to the ES is a touch of 950-954 which is the December levels
followed by the real resistance at 960-963 which was the August

The second chart shows the narrowing bearish wedge. This pattern
has an 83% chance of failure according to studies done in the
past. Where it might fail is the question. The touch of 946
today was a very good test of the upper resistance and where very
strong sell order resistance appeared. The bulls were unable to
dent it and more orders continued to appear. There is a definite
battle line drawn there and with only one economic report tomorrow
and on March numbers the focus may be on AMAT earnings instead.

Technically I would look for the ES to fail on any retest of
947-950. Sentiment could be another story. The remaining bulls
still on the sidelines feel the train has left the station and
they are racing to catch up. Tuesday will be a critical day.

ES03M Chart - 30 min

ES03M Chart - 240 min

The Nasdaq futures also touched the upper trend line and 1160
is shaping up to be battle line for tomorrow. Current support is
in the 1140 area.

NQ03M Chart - 180 min

The Dow futures came to a stop at the top of the up trend channel
but did break out of the 8600 top. This bullish jaunt could be
challenged tomorrow as the momentum cycle traders exit longs and
go short again. The current uptrend support is 8500.

The Dow is the only index in an uptrend channel instead of a
bearish flag. We should see really soon if the trend continues
or the bearish wedges on the other indexes prevail.

YM03M Chart - 120 min

The problem for tomorrow should be apparent. The charts are all
showing a dead stop at upper resistance. If the recent cycles
hold true we should begin seeing weakness either tomorrow or

This does not mean we are going to crash but simply we SHOULD
repeat the cycle to retest the uptrend lows. The crash conversation
will begin if those lows fail.

I am short from 945 because I felt the dead stop at 946 and all
the corresponding levels on the other indexes was too much to
overcome on the first attempt. We could easily slide into the
economic reports later in the week and then take our direction
from them. The +113 Dow points on Friday and the +122 today
should prompt some consolidation at the least or some profit
taking at the most before the AMAT earnings Tuesday night.

Bulls stampeded from the coral on Friday and continued their
romp today. After the month of gains they should be tiring soon.
Maybe this week, maybe next but overbought pressures are building.
Don't get caught in the implosion. Profit from it.

Jim Brown


Mach .97
Jonathan Levinson

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

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
DJIA      8854   8790   8680   8616   8506
COMPX     1565   1553   1533   1521   1501
SPX        958    952    940    934    923
OEX        484    481    476    473    468
QQQ      29.45  29.15  28.66  28.36  27.87

The bulls hesitated for a moment this morning, and drove the
indices to new rally and year highs, and then held them to within
a hair of those levels for the entire afternoon.  It was
reminiscent of the famous scene in "The Right Stuff", in which
Yeager, busted rib and all, pushes the 'Glamorous Glinnis' to
just below the sound barrier, not knowing if it was even possible
to push through.

The fed added a moderate $1.5B net with a $4B in three day
repurchase agreement against the expiring $2.5B in weekend repos.

There were some interesting divergences in volatility across the
indices, with the VIX dropping 0.62 to a new rally low, closing
at 21.42, QQV +1.72 to 28.50 and VXN +0.49 to 32.58.  Overall
volume was strong with 1.71B NYSE shares and 1.77B COMPX shares

The US Dollar Index spent the day recovering from its nightly
selloff, touching 94.11 before rebounding to above 94.50.  Gold
spent the day above the 350/oz level, with the Commodities Index
(CRB) breaking and holding above 240.

On to the charts:

Daily chart of the INDU

Today's action brought the INDU to, if not through the top
trendline on the ascending wedge.  In fact, if viewed as a wedge,
the pattern still looks intact, but as a flag, today challenged
some of the symmetry on the formation.  The stochastic reversed
before even touching the midpoint of its run from overbought,
printing another buy signal.  The shallowness of the pullback
followed by a renewed bullish cross is a very bullish signal.  If
tomorrow can give the bulls a further confirming advance, 9000 on
the Dow will begin to look like a reasonable destination.

Weekly chart of the INDU

Daily Chart of the SPX

The SPX tells the same story as INDU.  There's a fresh stochastic
buy signal, and no hint of a sell on the trending MacD.  Whether
the SPX can hold today's gains or returns to the lower trendline
(or the rising 5 day SMA) will have to be seen tomorrow.

Daily chart of the OEX

The OEX looks weaker than either the INDU or the SPX, having not
yet violated its upper trendline.  Is it trying to tell us
something about the conviction behind today's rally?  The OEX
(and NDX / QQQ) are generally thought to "lead" the broader
indices, being comprised of the favorites within those indices.
Once again, tomorrow will tell us.

In the interest of variety, and hopefully insight, I've attached
daily and weekly chart of the OEX:VIX ratio (and equivalent for
the QQQ:QQV).  As we've been seeing with the put to call ratio,
the relative level of an indicator is of greater significance
than its absolute level.  Particularly for the QQV, which broke
to alltime lows last week, its position relative to the QQQ is
instructive.  The thinking is that a reversal in the OEX relative
to the VIX will signal a change in trend.  On the charts below,
the moving averages are useful to smooth out the choppy candle

Daily chart of OEX:VIX

As the OEX rises and the VIX decreases, the OEX:VIX ratio
increases, and vice versa.  Note that on the daily candles, the
ratio is far beyond its January peak level.

Weekly chart of the OEX:VIX

On the weekly view, note that the OEX:VIX has not yet attained
levels comparable to those reached at the March 2002 peak.
However, the stochastic is very toppy and not yet trending.  The
OEX:VIX will reverse when the VIX begins to rise, relative to the
OEX, presumably by the OEX turning back down.  The weekly
stochastic tells us that this could come soon, while the slower
MacD is still on a bullish "buy" signal.

Daily chart of the COMPX

The COMPX, like the OEX, set a new rally and yearly high, but has
yet to violate the upper trendline.  There's no hint of a sell
signal on the oscillators, and we'll have to watch the upper
trendline tomorrow.  I see nothing bearish here other than the
well-described and over-discussed bear wedge.

Chart of the QQQ

Like the OEX, the QQQ chart looks weaker than that of its broader
index.  Note that the stochastic went below the 50 level, whereas
that of the COMPX did not, signaling less strength in QQQ than in
the COMPX.

I've included the QQQ:QQV charts below:

Daily chart of the QQQ:QQV

Note that today's spike in the QQV gave a strong "sell" on the
stochastic and the MacD, despite QQQ advancing today.  Does this
portend a change of trend, and a top this rally?  Again, tomorrow
will have to tell. But we have the first bearish cross on the
MacD in one month, and the strongest sell signal in several
months on the 10,1,5 stochastic if tomorrow does not reverse it.

Weekly chart of the QQQ:QQV

Tomorrow will be a critical day with respect to what was a very
bullish day for equities.  While bears have a very long list of
very convincing intermarket, macroeconomic and fundamental
arguments, the tape is the final arbiter for traders, and it's
been giving some bullish showings during the past month.  Whether
you're bullish or bearish, trade what you see.  In every case,
let your stops protect you.  There's no question that this rally
has produced some extreme overbought readers on different
indicators, but the price is the price.  See you tomorrow at the

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Mutual Funds Extend YTD Gains

All types of mutual funds produced positive total returns for the
week ended Friday, May 9, 2003, as investors found reasons to buy
both stocks and bonds.   Stocks finished higher Friday and on the
week as positive reports from chipmakers Intel and Nvidia spurred
a buying session.  For the week, the S&P 500 large-cap index rose
0.4%, the midcap index rose 1.0% and the small-cap index was 1.4%
higher.  Stock funds followed suit, with weekly returns generally
better as you moved lower in market capitalization.

While the Fed did not lower interest rates last week, it did say
it would do so, if necessary down the road to stimulate economic
growth.  So, while stock investors focused on positive corporate
reports, there was enough uncertainty about the economy to cause
bond prices to rise also.  In fact, the U.S. bond market (Lehman
Brothers Aggregate Bond Index) finished the week 0.9% higher vs.
the 0.4% weekly return for the U.S. stock market (S&P 500 index).

For the first time in a while, investment-grade bonds/funds did
better that high-yield bonds/funds overall.

Meanwhile, a weaker U.S. dollar padded the weekly total returns
for international stock and bond funds.  According to MSCI, the
EAFE index of developed foreign markets rose 1.9% for the 5-day
period, while the emerging-markets index was 2.3% higher in U.S.
dollar terms.  A number of international stock funds had weekly
total returns of at least 2.0% for the week.  The same was true
on the fixed income side, where a number of international fixed
income funds were up over 2.0% for the five days through May 9.

The average taxable money market fund now sports a 7-day simple
yield of 0.70% according to iMoneynet.com, providing protection
of principal but not much more.

U.S. Equity Fund Group

 Week   YTD
+0.4%  +6.8%  Vanguard 500 Index Fund (VFINX)
+1.0%  +5.1%  Vanguard MidCap Index Fund (VIMSX)
+1.4%  +8.2%  Vanguard SmallCap Index Fund (NAESX)
+0.6%  +7.1%  Vanguard Total Stock Market Index Fund (VTSMX)
+0.5%  +5.9%  Lipper Large-Cap Core Equity Fund Average
+0.9%  +6.1%  Lipper Mid-Cap Core Equity Fund Average
+1.4%  +6.2%  Lipper Small-Cap Core Equity Fund Average
+0.6%  +6.8%  Lipper Multi-Cap Core Equity Fund Average
+1.4%  +13.8%  Lipper Science & Technology Fund Average

A number of hot sectors contributed to the gains last week, but
perhaps none as strong as the energy/energy services sector, as
evidenced by the 6.8% weekly return produced by Fidelity Select
Energy Services Portfolio and the 6.7% return from Rydex Energy
Services Fund.  The REITs/real estate group was also relatively
strong as seen by the Alpine U.S. Real Estate Equity Fund's 5.6%
weekly total return.  With these two sectors higher, many value-
driven funds performed well.

Electronics, computers and tech stocks enjoyed price gains also.
For the week, Fidelity Select Electronics Portfolio gained 3.3%,
Fidelity Select Computers Portfolio rose 3.0%, and the Fidelity
Select Technology Portfolio picked up 2.4%.  That gives an idea
of the returns possible in the specialty-technology fund sector.

The top performing diversified U.S. stock fund group was small-
cap value funds, which averaged 1.7% for the week, according to
Lipper.  Small-cap core funds, small-cap growth funds, mid-cap
value and tech sector funds averaged 1.4% for the 5-day period.
Heartland Value Fund, Strong Advisor Small Cap Value Fund, FPA
Capital Fund, PIMCO Renaissance Fund, Meridian Value Fund, DFA
Small Cap Value Portfolio and Weitz Value Portfolio are some of
the larger value-driven funds to return over 2.0% for the week.

International Equity Fund Group

 Week   YTD
+1.9%  +3.7%  Vanguard Developed Markets Index Fund (VDMIX)
+2.3%  +5.4%  Vanguard Emerging Markets Index Fund (VEIEX)
+1.8%  +3.8%  Vanguard Total International Stock Index (VGTSX)
+2.1%  +3.0%  Lipper International Fund Average
+2.0%  +5.6%  Lipper Emerging Markets Fund Average
+3.4%  -6.2%  Lipper Gold Fund Average

The average international stock fund returned 2.1% last week for
investors, according to Lipper, outpacing the 1.9% return by the
Vanguard Developed Markets Index Fund (MSCI EAFE Index).  As was
the case with diversified U.S. equity funds, the best performing
funds in the international class last week were value-driven and
small-cap oriented.

Among global funds with over $500 million in assets, the highest
weekly performers included DFA International Small Cap (+3.4%),
GMO International Small Companies (+3.4%), Sanford C. Bernstein
International Value (+3.2%), Liberty Acorn International (+3.1%)
and Glenmede International (+3.1%).  The top weekly return among
all global funds was the ProFunds Europe 30 Fund, up 8.0% on the
week.  The Korean Investment Fund had another good week, up 5.7%.

The average gold mutual fund returned 3.4% last week, and is now
down just 6.2% on a year-to-date basis through May 9.

U.S. Fixed Income Fund Group

 Week   YTD
+0.5%  +2.1%  Vanguard Short-Term Bond Index Fund (VBISX)
+1.7%  +4.8%  Vanguard Intermediate-Term Bond Index Fund (VBIIX)
+2.3%  +6.1%  Vanguard Long-Term Bond Index Fund (VBLTX)
+0.9%  +3.1%  Vanguard Total Bond Market Index Fund (VBMFX)
+0.3%  +1.6%  Lipper Short Investment-Grade Fund Average
+0.8%  +3.7%  Lipper Intermediate Investment-Grade Fund Average
+0.8%  +1.9%  Lipper U.S. Government Fund Average
+0.9%  +3.6%  Lipper Corporate A-Rated Debt Fund Average
+0.2%  +12.1%  Lipper High-Yield Fund Average

As you can see, the long end of the yield curve produced the best
returns for the week, with the Vanguard Long-Term Bond Index Fund
up 2.3%.  Its sibling, Vanguard Intermediate-Term Bond Index Fund
produced a weekly total return of 1.7%.  The two bond index funds
outpaced most actively managed fixed income funds, which returned
1.0% or less last week, using the Lipper averages above.

The PIMCO Real Return and Vanguard Inflation-Protected Securities
Fund were two popular inflation-indexed funds to return over 2.0%
last week to lead the U.S. government debt fund group higher.  In
the fixed income category, Vanguard Long-Term Corporate Bond Fund
was among the week's highest performers.  It returned 2.3% on the

PIMCO Total Return Fund, the nation's largest bond fund, was 0.7%
higher during the week, but slightly lagged its intermediate-term
bond fund peers.  American Funds Bond Fund of America gained 1.2%
for investors, one of the better returns in the group among funds
with more than $1 billion in assets.  The fund's high-yield stake
has worked in its favor in 2003 relative to bond funds that don't
generally invest in the junk bond sector.

International Fixed Income Fund Group

 Week   YTD
+1.6%  +7.3%  Lipper Global Income Fund Average
+2.2%  +8.2%  Lipper International Income Fund Average

The week's best returns in the broad fixed income group belonged
to international bond funds as evidenced by the 3.0% return from
the Munder International Bond Fund and the 2.9% return on the T.
Rowe Price International Bond Fund.  Several international fixed
income funds returned at least 2.5%.

The dollar's tumble in 2003 against major foreign currencies has
enhanced the returns produced by international bond funds so far
this year.

Balanced Fund Group

 Week   YTD
+0.7%  +5.5%  Vanguard Balanced Index Fund (VBALX)
+0.7%  +5.1%  Lipper Balanced Fund Average

With the S&P 500 stock index up 0.4% and the LB Aggregate index
0.9% higher, the average balanced fund returned 0.7% during the
week, per Lipper.  With undervalued small-cap stocks doing well,
Oakmark Equity & Income Fund had one of the week's best returns
in the balanced group, picking up 1.3% over the week.  Fidelity
Balanced Fund gained 1.1%, while Vanguard Wellington Fund had a
1.0% weekly total return.

Some global/international balanced funds returned more than 2.0%
for the week.  For instance, the Advantus International Balanced
Fund produced a 2.6% weekly return for investors.

With bond prices higher, hybrid funds with high bond stakes such
as Vanguard Wellesley Income Fund also performed well.  Vanguard
Wellesley Income returned 0.9% last week.

Money Market Fund Group

0.70%  iMoneyNet All Taxable Money Market Fund Average

The average taxable money market fund's trailing 7-day (simple)
yield slipped one basis point to 0.70%, according to the latest
weekly report by money fund tracker, iMoneynet.com.  The PayPal
Money Market Fund (402-935-733) continues to sport the highest
current 7-day simple yield among all prime retail, money market
funds.  It has a 7-day simple yield of 1.21%, per iMoneynet.com.

Fidelity Cash Reserves Fund, the largest U.S. money market fund,
currently offers a 0.98% yield.

Mutual Fund News

In Morningstar.com news, Credit Suisse intends to merge two of
its funds.  Credit Suisse Global Technology (WPGTX) and Credit
Suisse Global Health Sciences (WPHSX) will combine into the $47
million, Credit Suisse Global Post Venture Capital Fund (WVCCX).
The Global Post Venture Capital Fund already invests heavily in
the two sectors - technology and health.

Meanwhile, Wasatch Funds plans to launch a new value fund named
Wasatch Micro Cap Value Fund that will invest in companies with
market capitalizations of less than $750 million and close when
its total assets reach just $20 million.  There's a significant
price to pay, however.  According to the Morningstar story, the
fund's estimated expense ratio is 2.50%.

In another story, the Delaware Funds is starting a fund-of-funds
series known as the Delaware BOB (Best Of Breed) Funds.  Per the
SEC filing, six funds will be offered: large-value, large-growth,
small-value, small-growth, international, and fixed income.  The
sub-investment advisers are top names in the business, including
T. Rowe Price, Marsico Capital Management, MFS, Van Kampen Group,
Liberty Wanger Asset Management, and Hotchkis & Wiley, to name a

For more information, see the Morningstar.com Fund Times report.

Steve Wagner
Editor, Mutual Investor

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Planning For The Future(s)
by Mark Phillips

After sharing my rationale for taking a serious look at trading
index futures last week, it's time to lay out the action plan for
actually trading this different vehicle.  There are as many
different approaches to trading any given vehicle as there are
traders, but what I'm going to lay out is a strategy that I
believe fits with my trading style, albeit modified for the
particular characteristics of the futures markets.

Over in the Futures Monitor, Jim Brown and Alan Hewko cover what I
think are the two extremes in this arena.  Alan's style is to
target small and quick gains several times per day in what I would
term a scalp trade fashion.  Jim, on the other hand, lies in wait,
seeking a position trade setup where he can ride the market for a
large move.  Neither approach is good or bad in absolute terms.
Both Jim and Alan have gravitated to the trading style for Futures
that best suits their own individual preferences.  Do you think
it's a safe bet that each of them developed a written trading plan
before embarking down the path of trading futures?  Me too!  As
Jeff Bailey has conveyed on more than one occasion, a written
trading plan (that is followed in a disciplined manner) is the
foundation of long-term success for any trader.

Having come to the same conclusion on my own long ago, once I
determined that futures trading made sense (for all the reasons
detailed in last week's article), my next step was to develop a
futures trading plan for myself.  If you missed last week's
article, you can catch up here:

The Case For Futures

As I've mentioned in the past, I'm not a hyper-active day trader
and my trading style would not be a good match to taking 5-8
trades per day.  I'm also not a momentum trader, as I prefer to
buy support and sell resistance, placing stops just the other side
of that support/resistance level.  That predilection led me to
define the types of trades I'm interested in as those that give me
a defined entry point at support/resistance and should have some
room to run.  The first question is "How Far"?  Actually I need to
back up a bit and give you some basic parameters that I knew I
would apply before I even started on my business plan.

Futures are a leveraged instrument, just like options.  But there
are some important differences from the standpoint of risk.  When
we buy an option, we know exactly what our risk is -- it is the
premium paid for the option.  In futures, our risk is literally
unlimited, making stop-losses mandatory.  Take a hypothetical
position in the ES contract.  It takes roughly $1800 in margin to
initiate a 1 contract trade in the ES and roughly $1400 in margin
to maintain that position.  But that isn't the extent of the risk
in trading this contract.  For each point of movement in the ES,
that equates to $50 in trading profits/losses.  So a 20 point move
would equate to $1000 profit or loss, depending on the direction
of the move and which side of the market I was on.

Clearly, letting a futures trade run 20 points against me is
unacceptable, and that mandates using hard, not mental stops.
Look at an intraday chart of the ES, and we can see that it can
easily move 10-12 points in a fairly short period of time.  Just
today, the ES launched from below 930.00 at 9:45am ET to 943.50 by
11:45am ET.  That was a 13-point ($650) move in a short 2 hours.
In fact that is just the sort of move that I want to target in the
futures arena.  Buy support and sell resistance.

Due to the leverage involved and the given the possibility of
large overnight gaps, I made an early decision that holding over
the close was not compatible with my risk profile.  While I
wouldn't rule out initiating a trade ahead of the 9:30am ET cash
market open (trading a move generated by a pre-market economic
report) or holding into the 4:15pm ET close of ES trading, I did
rule out holding a trade beyond that ES "closing bell".

Now that I've defined the maximum duration for a futures trade, I
need to decide what I'm going to target in terms of gains from any
given trade.  My gut feel is that on any trade that would net 10
points from the ES, I would consider it a success and take
profits.  But I needed to verify that this is a reasonable range
based on the way the ES trades.  So I applied the Average True
Range (ATR) indicator to the daily chart of the June ES futures
contract (ES03M) and found that for the past 3 months, the 14-day
ATR has ranged from 15-22 points.  I don't harbor any illusions
about being able to capture anywhere near the full range for any
given day, and would be quite content to harvest roughly half of
the total range on any given day.  Based on the action over the
past few months, 8-10 points seems like a reasonable target.

Next up is risk control.  I have to decide what the maximum loss
is that I'm prepared to assume on any given trade.  I'm going to
work under the assumption that my technical analysis skills are
good enough to allow me to win 50% of my trades.  I know some
weeks I'll do better, while other weeks will be worse.  But over
the long haul, I ought to be able to bat .500 or better.
Otherwise there is something wrong with the way I'm selecting my
trades.  Right?

A philosophy that I have applied for years to all types of trading
is that I always want at least a 2:1 reward/risk ratio.  So if the
low end of my targeted move is 8 points, then the maximum risk to
my stop should never exceed 4 points.  I may use a tighter stop,
depending on where the trade entry is relative to
support/resistance, but never a more liberal stop.  There will
obviously need to be some parameters on when to tighten stops and
by how much, but that's a topic to be covered as we get into the
exercise of paper trading.  What I've done here is assume my win
ratio will be approximately 50% and my targeted profit on any
given trade will be 8 points with a maximum risk of 4 points.
That last parameter gives me the 2:1 reward/risk ratio I seek.

So now we've gotten enough data/assumptions together to define the
basic trade parameters that I'm looking for.

1. Only trade during the day session and never hold a trade beyond
the 4:15pm ET close.
2. Profit target on any trade is from 8-10 points.  If I can't
envision a move of that order from the current level, then I just
don't take the trade.
3. Always use hard stops, never taking more than 4 points of risk
from entry.

Alright, now we're starting to get somewhere.  I've defined my
rationale for trading the futures vs. index options, and laid out
the basic money management parameters that will govern my trade
management.  The next step in this adventure is to determine how I
will get into a trade.  Will I use oscillators and on what time
frames?  How about chart patterns like wedges, channels, flags,
etc.?  Which ones and how much weight do I apply to them versus
other indicators?  What about moving averages, Fibonacci
retracements and Bollinger bands?  This is an arena where each
trader must make their own decisions.  Part of the decision will
be based on familiarity, while we also need to be prepared to
abandon studies that don't work particularly well and embrace new
ones with which we are unfamiliar if we find that they provide
useful and tradable information.  Note that we've now gone through
2 entire articles without looking at a single futures chart.  That
is necessary at this stage of the business plan development, but
it will change next week as our discussion will become much more

When I started last week's article, I was under the mistaken
impression that the topic of a primer on Futures trading is one
that could be covered in 2-3 articles.  Given the fact that I'm
just now reaching the point of addressing the trade selection
criteria, I think it is clear that I grossly under-estimated the
magnitude of the task.  As it is, I'm essentially out of time for
today's article.  It may seem like slow going, but I think the end
result will be worthwhile for those of you that care to tag along
for the journey.  By the time we're finished, we ought to have a
solid futures trading plan that anyone can use or modify for their
own trading.  So next week, I'll outline the technical approach I
will use in my own futures trading exploits.  Then we'll be in a
position to embark down the road of paper trading the ES, using
the knowledge we gain there to better define the fledgling trading
plan prior to ever placing a live-money trade.  I know the process
may seem tedious to those that just want to dive right in, but in
my experience, this type of exercise is essential to trading

If you're with me up to this point and not bored by our lack of
progress thus far, I've got a little exercise for you over the
next week.  Start watching the ES contract during the day (or
analyze it in the evening).  Apply the indicators and studies you
would normally use.  Make sure to look at the ES across multiple
time frames.  As a hint, my analysis will span from weekly/daily
charts, all the way down to the 5-minute and even the 2-minute
chart.  Look at the ones that seem to work and those that don't.
That's what we're going to discuss next week and if you go through
the process on your own, then our discussion next week ought to be
much more valuable, as you'll have a background of experience to
apply to that discussion.

See you next week!


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options," claims author Larry Spears in his new compact guide book:

"7 Steps to Success – Trading Options Online".

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Contact Support
The Option Investor Newsletter                   Monday 05-12-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

Stop Loss Updates: ADTN
Dropped Calls: None
Dropped Puts: None
Play of the Day: Call - ADTN
Market Posture:

Updated on the site tonight:
Market Posture: Another Strong Day

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Anything else is too slow!



ADTN - call
Adjust from $42.50 up to $45.00





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offers true direct access to each option exchange
offers stop and stop loss online option orders
offers contingent option orders based on the price of the option or
offers online spread order entry for net debit or credit
offers fast option executions

PreferredTrade offers these online option trading features and more;
call 1-888-889-9178 or click for more information.



ADTRAN, Inc. - ADTN - close: 46.95 change: +1.90 stop: 45.00*new*

Company Description:
ADTRAN, Inc. develops products and services that simplify access
to telecommunications networks.  The company's high-speed, digital
transmission products improve the operation of, and reduce the
costs associated with, building and using communications networks.
Small and large telephone companies, long-distance carriers and
other network service providers use the company's products to
deliver high-speed data, voice, video and Internet services to
their customers.  Businesses, schools and government agencies use
ADTN's products to connect facilities, remote offices and mobile
workers, enabling corporate information services, Internet access,
telecommuting and videoconferencing within their organizations.

Why we like it:
Amazing strength is the only way we know to describe our ADTN
play.  After the impressive breakout through the $41.50 level, the
stock surged all the way up to test our first profit target in the
$44-45 area, hitting an intraday high of $45.17 last Monday.  As
expected, the stock needed some time to digest those gains and
gradually pulled back through the middle of the week.  Amazingly,
buyers stepped up to grab the bargain at $43 on Thursday and
continued that spending spree on Friday, propelling ADTN back over
the $45 level at the close.  With daily Stochastics trying to turn
a short-cycle bullish reversal, it looks like this one is going to
take a run at our final target in the $48-50 area.  New entries
taken on the dip to $43 on Thursday look very favorable and a
secondary dip to the $43-44 area should work for new entries as
well.  Momentum traders looking to capitalize on another breakout
move can use a move above $45.25 to enter the play, targeting a
quick move up to that $48 level.  Given the strong support shown
last week, we're raising our stop to $42.50, which is just below
the rising 10-dma.

Why This is our Play of the Day
After testing the $45 resistance level early last week, our ADTN
play pulled back ever so slightly, found support at $43 and then
surged higher into the close on Friday.  Apparently that was just
the opening act, as the stock plowed through that resistance with
conviction on Monday, tacking on more than 4% on volume that
exceeded the ADV by a hefty 55%.  Our eventual target for the play
was for a move into the $48-50 area, and with another strong
performance ADTN will be right in the middle of that zone.  Rather
than focusing on new entries for the play, with better than a $6
gain from the point where we picked it, we want to focus on
harvesting gains.  ADTN is stretching well away from what was
already a steeply ascending trendline and Monday's close puts the
stock above the upper Bollinger band.  A further upward move early
on Tuesday should be used to harvest gains in the play and it is
entirely possible we'll err on the side of caution and close the
play tomorrow with a close between $48-50.  In addition, we're
getting aggressive with our stop, raising it to $45, which was the
stock's opening low today.

Suggested Options:
Shorter Term: The June 45 Call will offer short-term traders the
best return on an immediate move, with manageable risk.

Longer Term: Traders looking to capitalize on a sustained breakout
move towards our $48-50 target zone will want to look to the
August 50 Call.  These options are currently out of the money, but
should provide sufficient time for the stock to move higher
without time decay becoming a dominant factor over the short run.

BUY CALL JUN-45 RQA-FI OI= 751 at $3.70 SL=2.00
BUY CALL AUG-45 RQA-HI OI=1091 at $5.20 SL=2.50
BUY CALL AUG-50 RQA-HJ OI= 200 at $2.70 SL=1.25

Annotated Chart of ADTN:

Picked on April 29th at  $40.70
Change since picked:      +6.25
Earnings Date          07/15/03 (unconfirmed)
Average Daily Volume = 813 K

"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".

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



More Four-Lettered Stocks

Intuit - INTU - close: 38.88 change: -1.05

Noticeably weak on a two-day rally in the markets, shares of INTU
look like a short candidate.  However, Wednesday will be the
telling day as the company announces earnings after the close on
Tuesday.  If you're willing to gamble, lotto players could pick
sides tomorrow.  Frankly, we're not willing to throw the dice on
this one but we'll watch and see what direction it goes.



PACCAR - PCAR - close: 62.37 change: +1.46

The non-stop rally in shares of PCAR make us wish we had gone
long on the bounce at $50 a few weeks ago.  While shares look
very over-extended, if the trend holds up, aggressive bulls could
go long PCAR on a pull back to $60.00 with a very tight stop



Guidant Corp - GDT - close: 42.30 change: +2.32

An analyst report out that suggests heart-device makers like GDT
will be the early winners in any proposed changes for Medicare
coverage.  The stock rallied 5.8% on the news, rocketing over
resistance at $40.  Should the stock pull back, GDT might make an
attractive long play for traders.



Linear Technology - LLTC - close: 36.77 change: +0.43

The SOX is looking a lot stronger than it did last week.  Shares
of this chip company might be able to pose a rally towards the
$40 level if the market cooperates.  Dips to $35.00 might be
buyable if the NASDAQ holds the bottom of its rising channel.



Another Strong Day

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


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