Option Investor

Daily Newsletter, Thursday, 05/15/2003

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The Option Investor Newsletter                Thursday 05-15-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap:              Confused?
Futures Markets:   Higher Low
Index Trader Wrap: Weak enough to choke a horse.  But feed a bull?
Market Sentiment:  Chiming In
Manager Microscope: Hitesh P. (John) Adhia: Adhia Twenty (ADTWX)

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      05-15-2003           High     Low     Volume   Adv/Dcl
DJIA     8713.14 + 65.30  8727.78  8643.11 1.81 bln 1993/1237
NASDAQ   1551.38 + 16.50  1552.98  1536.03 1.98 bln 1889/1345
S&P 100   477.68 +  3.70   478.96   473.98   Totals 3982/2582
S&P 500   946.67 +  7.39   948.23   938.79
W5000    9016.32 + 65.00  9026.90  8945.94
RUS 2000  422.05 +  2.61   422.24   419.25
DJ TRANS 2436.79 - 20.80  2459.16  2419.65
VIX        21.67 -  1.09    22.82    21.47
VXN        32.18 -  0.96    35.04    31.56
Total Volume 4,021B
Total UpVol  2,670B
Total DnVol  1,279M
52wk Highs  574
52wk Lows    25
TRIN       0.75
PUT/CALL   0.64


Welcome to the club. Analysts, commentators and bears are clueless
but bulls could care less. They are buying every dip regardless of
the economic news. A silver lining is found in every cloud and
the indexes are pressing ever nearer to new highs. Instead of
following the "sell in May and go away" axiom the new standard
is "play until May." This means bulls are ignoring all economic
reports for the March/April period as irrelevant and buying
everything in sight in hopes May reports will show a strong post
war spike.

Economically it was a potpourri of results with improvement in
some areas and 48 year lows in others. By far the biggest report
of the day was the PPI which dropped -1.9% and the largest drop
ever since the index was instituted in 1945. While severely
negative on the surface the major component in dropping prices
was the fall in energy prices since the war. The core rate,
ignoring things we do not use like food and energy, still dropped –
0.9% and more than analysts expected. Analysts were sharply divided
about the PPI proving the deflation scenario. They claim the
lower dollar will pressure import prices but those prices are
not directly reflected in the PPI. Others say the drop in the
core rate is following the decline in spending and manufacturing
levels since January and is inline with the current economic
trend. Either way the bulls cheered the potential for aggressive
Fed stimulus ahead to stop the slide.

Industrial Production dropped -0.5% for April for the second
consecutive month. Despite the end of the war and positive
consumer sentiment the demand has not increased. Weakness in
nearly all the components showed the continued slide to be
broad based. Production of consumer products fell for the third
month. Capacity Utilization fell to 74.4 and the lowest level
since 1983. This does not bode well for hiring and could be seen
as a potential for further layoffs.

The Philadelphia Fed Survey fell more than expected at -4.8% but
less than the average of the last two months at -8.4%. This was
seen as the potential for a recovery beginning. It could just be
a statistical anomaly related to the upturn in consumer sentiment
over the last month and we will not know if it will stick until
the next report. There were two new questions added to the survey
this month. Suppliers were asked if they were seeing any
improvement in business conditions since the end of the war. 83%
said no. They were also asked if their customers were seeing any
improvement in demand since the war. 90% said no. This does not
paint a positive picture for the post war bounce.

There was a post war bounce in New York as shown by the Empire
State Index which rose to 10.6 from last months -20.2 disaster.
Every component improved except prices received. Deflation again?
Some businesses said they were hiring again, which could be
related to the revitalization around ground zero as well as the
post war impact. Dead cat bounce from the -20 last month? We will
have to wait until next month to see.

The homebuilder sector saw the NAHB Housing index rise again from
52 to 56 indicating sales are growing again. With the mortgage
rates dropping again there should be another wave or prosperity for
this sector. The optimism component rose to 68 and a level not seen
since year end. Here comes yet another short squeeze for those
short the builders.

Business Inventories rose +0.4% and slightly higher than expected.
This was a March number and a surprise considering it was pre war.
This report would seem to be contradicted by several more current
economic reports from different viewpoints.

Jobless Claims fell slightly to 413,000 but posted the 13th month
over 400K. The continuing claims rose to 3.8 million and with the
Challenger Layoff report indicating 138,000 mass layoffs due this
month the odds are good it will rise again. Last weeks number was
revised up by +5,000. The insured jobless rate rose to 3.0% and the
highest level since 9/11. Currently 41% of jobless run out of
benefits before finding work. Estimates are for an additional 1.1
million jobless running out of benefits over the next six months
due to the declining jobs market. Many workers are simply giving
up on the search with the labor force participation rate declining
from 67.4% to 66.4%.

Switching to the tech sector for guidance we had a very positive
earnings report from Dell but CEO Michael Dell refrained from
saying much about the health of the economy. He placed the focus
back on Dell continuing to take market share from all companies in
all geographies in the server market. He continued to stress that
capturing market share was driving unit growth and cutting costs
to an all time low were helping earnings. Nothing there says the
tech sector is growing, only that Dell is performing well, very

A better snapshot came from Intel CEO Andy Bryant, which was caught
on tape saying "I do not see an economic recovery this year and I
am just hoping for a better year in 2004." Oops! Intel did affirm
their estimates for the quarter but Bryant did express concern for
the potential SARS impact. Bryant said he was less optimistic near
term but still had hopes for a long term recovery.

Following his comments the Semi Book-to-Bill report for April was
released, which showed a drop to .86 in April from .91 in March.
This was the lowest number since November when the recent rise
passed 80 to the upside. This is a three-month moving average,
which means the actual numbers are much lower. The three-month
average of global bookings fell to $737 million in April. March
bookings were revised down from $822 million to $777 million.

Book-to-Bill Table

For the average to fall to $737 the actual bookings are probably
below $675 million for April. They do not release the actual
numbers to prevent judgments based on volatility in a specific
month. If you calculate backwards it would appear something in the
$673 million range should be in the ballpark. It will be hard for
the bulls to spin this downward revision for March by -5.4% and
then another -5% drop in April numbers. (-13.3% drop in April if
you use the actual $673 million) This is not painting a positive
picture for the semi sector and shows the reason for caution in
Andy Bryant's comments.

There are so many things to touch on tonight and Friday brings
another set of critical reports. I am not going to go into great
detail on everything today because I find myself repeating many
of the facts in the longer version of the weekend wrap. Other
problems impacting sentiment today were weak showings by FD, TGT
and KSS in the retail sector. The war is over but retail is still
fighting for survival. TGT missed earnings by a penny and warned
that weak demand was depressing the outlook.

Part of the boost today was caused by IBM, which hosted an analyst
conference yesterday. Again bulls practiced selective hearing and
only heard the "tech demand stabilizing" comment and disregarded
the "tech spending flat for 2003" and "infrastructure and services
businesses facing a tough time". Also helping traders was the news
UAL reinstated 160 flights that were cancelled due to lack of
demand before the war. They said they were seeing demand pickup
slightly.  It did not help the transport sector because truckers
were on the outs due to falling shipments. ROAD and YELL officers
said at the Bear Stearns conference that the economy remains "very
flat". The YELL chairman said they had been tracking the economy
for some time and there was "no pickup or decline". The transports
lost -21 points on the less than exciting comments.

The parade of analysts saying the rally has farther to run is
slowing and the number of analysts suggesting the opposite is
growing. Dick Arms added his name to the list of technicians
saying the rally was about to slow with a prediction of a pull
back to Dow 8200 and Nasdaq 1400 soon. He said the TRIN was showing
very overbought conditions and an oscillation extreme. I have
talked with Mr. Arms many times and he has spoken at several of
our seminars. His work spans several decades and is normally
technically correct. It is based on advancing and declining volume
patterns which are a good sign of market internals but fail to take
into account external news factors. He is strictly technical and as
we know you can be technically right but at the mercy of news
and timing.

I told readers on the Futures Monitor today that I had no bias.
I had recently been economically bearish but moving to bullish as
the number of reasons for aggressive Fed action increased and
technical resistance on the indexes was broken. The total
disconnect to the economic factors this morning took away my bias
in both directions. It is ok to be bullish based on a viewpoint
that conditions "may" be improving and the Fed "may" act
aggressively.  However, to be bullish in the face of the worst PPI
ever, second worst core PPI ever and a new 45 year high for bonds
was simply unjustified. If I did not have so may readers emailing
their bearish ideas I would swear every last trader had converted
to buy the dip.  That alone should convince everyone this rally is

The bullish case today was built on the NY Empire report and a
bad Philly Fed Survey. It was just not as bad as last month. With
the bad PPI the Fed is even more likely to cut rates in June and
that will help stimulate the refinance wave and home buying as
well as business in general. Will that be enough to lift the
economy over the summer slump? The bulls are betting on it.

When I started this wrap I was neutral. Confused but neutral. I
literally spend about 16 hours a day studying the markets. I read
every scrap of data and analysis I can find. I watch the indexes,
trade and read hundreds of emails including other newsletters every
day. I am still confused. In my opinion I think the rally has been
overdone for the last 500 points. But, and this is important, every
major rally in the past has had the same critics saying the same
thing all the way up. Bull markets are built over a wall of worry
and over the backs of screaming bears. The constant short, cover,
short, cover pattern by the disbelieving bears helps fuel the gains
to highs otherwise unachievable on simple economic justifications.

I have been guilty of overzealous bullishness and bearishness in
the past and I am sure my bearish economic have been coming through
loud and clear lately. I think the factors this time around have
changed ever so subtly week by week since March. Each new spin
cycle is good for one more week. First it was the gains in front of
the  war, the gains when the war started, the gains when it was
going  well, gains when it was over, gains on technical levels
(200DMA)  being broken, gains on Fed comments, gains on 65% of
companies  beating absurdly lowered estimates, etc. Each week it is
something  new and none of them were realistic. The market went up
on a change in sentiment and reality had nothing to do with it.
After three years of pain traders wanted to believe. They wanted to
hope. That hope has propelled the indexes to new highs for the
year. The major indexes are up over 20% on average from their lows.
Now what?

Like Leigh Stevens said in his Sunday Index Trader Wrap, "If not
stocks then what?" I do not see traders plowing boatloads of new
money into bonds with yields at 45 year lows. They are still going
up but just like stocks in 2000, trees do not touch the sky. Nobody
wants to buy at the top of anything, stocks or bonds. Yes, stocks
are way overvalued considering an estimated +4% earnings growth for
Q2. But are they really considering the alternative? Money markets
are going to start charging soon to hold your money. Bonds will
eventually collapse on the first really positive piece of economic
news. If not stocks then what?

Yellow Freight, not a highflying tech company said they could
double their earnings with only a 10% increase in business. How
much more can Cisco, Dell, IBM, MSFT or any other cut to the bone
company increase their profits on any real recovery? The point is
not whether we will have a recovery but when. There will not be an
alert triggered across your TV screen like a severe storm warning.
"Attention, the recovery has started, take shelter in stocks now."
Investors are simply looking at the alternatives and saying there
is no future in bonds or money markets and we have to be closer to
a recovery now than 6, 12, 18 or 24 months ago. They are holding
their nose and buying stocks in hopes of riding out the summer and
seeing a better second half. Actually I think most are hoping the
economics deteriorate over the summer to encourage even more
stimulus to even further juice the economy when the rocket finally

What I am really expecting is the mother of all asset allocation
programs soon. It may not be tomorrow but it could be soon. Once
the Fed or a Fed governor starts making noises that there will be
no rate cut it will look like a game of hot potato. Institutions
will be dropping bonds faster than Andrew Firestone dropping
bachelorettes when the tide turns. They will be racing to
reallocate their portfolios and invest their massive profits from
the bond boom. The next Fed meeting is not until June 24th and
there is a 100% chance the Fed will cut by at least 25 points.
There is a growing chance they could cut by 50 points. If you were
a fund manager sitting on several billion in bonds you might wait
for that meeting on the hopes of a 50 point cut giving your
portfolio one more spike before selling. There is a better chance
that the hopes for a cut are already priced into the market and
we could see some early sellers soon. With bonds yields at 45 year
lows how much how much farther can they go? Trying to milk that
last few cents by waiting could be disastrous if a couple economic
reports showed signs of life. Like the NY Empire Index and the
Philly Fed Survey today? If you were sitting on mountains of bonds
like Scrooge McDuck in his money bin would those reports make you
nervous? Bond yields closed right a triple bottom on Thursday that
corresponded with the October-10th, March-12th equity market
bottoms.  Where are the markets today? At the highs for the year.

Dow/$TNX.x Chart - daily

I am going to leave you with this thought. Based on the chart
above what do you see happening? There are only two rational
alternatives to this totally irrational situation we are in now.
One possibility is the market is going to crash and bond yields
are heading for a 100-year low. The other possibility is we are
about to explode over that down trend resistance at Dow 8725 and
bond holders are going to take their profits and run to the
potential 6-12 month returns in stocks. Which makes more sense?
Bonds going to 100-year highs or stocks breaking out on hopes
the economy recovers in the next 12 months? Either way it should
happen any day. The ideal situation would be one more dip in the
market with bonds making one last climax high. Then traders would
feel much better about not having to buy stocks at the highs
before summer. But then, ideal scenarios seldom come to pass.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


Higher Low
Jonathan Levinson

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

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
DJIA      8758   8703   8673   8618   8588
COMPX     1564   1557   1546   1540   1530
ES03M      955    951    944    940    933
YM03M     8768   8733   8680   8645   8592
NQ03M     1178   1171   1161   1154   1144

Equities gapped up at the open, set their highs of the day and
then declined to their lows, spending the remainder of the day in
a rangy drift higher.  The main difference between today's
session and yesterday's was that the decline put in a higher low,
and the afternoon range had an upward bias instead of a lower
one.  Today felt considerably more bullish than yesterday.

The US Dollar Index also put in a higher low and then launched,
blowing out the 95.00 resistance level that has held since last
week.  Not surprisingly, commodities got sold, but the CRB
declined only .96 to close at 240.63, with strength in wheat,
corn, frozen concentrated OJ, live cattle and gold futures.  June
gold was down 40 cents to 352.10 as of this writing.

15 minute chart of the US Dollar Index

I mentioned that today felt bullish.  The COMPX bounced at its 5
dma, with the 10,1,5 stochastic turning back up deeper into
overbought.  It did so on heavier volume as well.

Daily Chart of the COMPX

The topping trend that we had been watching on the QQQ:QQV ratio
chart reversed to the upside as well, giving us a bullish cross
on the 10,1,5 stochastic and even setting a slight up-tilt to the
MacD fast line.

Chart of the QQQ:QQV ratio

The implication of this upturn is that relative the QQQ, the QQV
became smaller today, which is a bullish development we had not
yet seen this week.  The stochastic cross tells us that it was a
strong move, while the slower MacD has yet to be convinced.

60 minute chart of the NQ3M

While the ascending trendline on the The Wedge (it now deserves
to be capitalized, given its amazing staying power) has yet to
be broken on the daily chart (See the COMPX daily chart above),
and the fact that today was very nearly an inside day.  The
bullish implications of the higher low (seen below on the 2 day 5
minute chart) cannot be ignored, and I've chosen to highlight the
bullish ascending triangle formation on for this reason.  As seen
on the 60 minute NQ chart, the upper horizontal trendline has
held back every advance this month.  However, the pattern of
higher lows is clear, and these triangles tend to break to the
upside.  The Wedge on the daily timeframe is bearish, but given
the pattern of higher lows within it, and the incredible
inability of the market to concerned itself with news, no matter
how bad, it's entirely possible that we'll witness an upward

5 minute chart of the NQ

The 5 minute candles on my intraday chart show a bullish tilt to
today's trading, but the action at the close drilled the short
term oscillators into overbought territory.  Some minor downside
at the open is therefore to be expected, but a successful break
of the upper trendline either cannot be ruled out.

60 minute Chart of the ES

Now that I've gotten this bullish bias out of my system, I can
focus on the bearish interpretation.  We see in the chart of the
COMPX above (daily view) and in the 60 minute NQ, ES and YM
contracts that the stochastics are becoming toppy across the
daily, 60 minute and 5 minute timeframes.  This can either signal
a trending move (such as if the upper horizontal resistance line
finally breaks), or a good setup for a short on a failure at
upside resistance.  The best short entries are set up when the
oscillators across all timeframes are singing their overbought
song simultaneously, and the relentless drift higher this
afternoon combined with the morning's higher low set the stage
for such an entry, * but only on a failure at resistance. *

5 minute chart of the ES

Still wearing bearish goggles, we note the slight decline to the
upper trendline on the above 2 day 5 minute chart of the ES.
It's a small straw at which to grasp, but it's there nonetheless.
As with the 5 minute NQ and YM charts, we see the slow stochastic
(SST on the above chart) in overbought territory.

60 minute chart of the YM

There 's little to add for the YM contract, and more than
anything, this illustrates that it remains a scalper's market.
As The Wedge and the shorter timeframe triangles grow ever closer
to the apexes (apices?), it becomes increasingly risky to put on
a longer term position unless you have a sufficient bullish or
bearish bias to allow you to do so in confidence.  I have never
before seen so much frustration amongst bears, and even the
bullish noises from the usual suspects are sounding a little
tinny.  Such is the nature of ascending wedges, particularly as
they near their tops.

5 minute chart of the YM

Linda did an excellent job last night illustrating the various
breadth and sentiment measures that this rally has given us.  The
QQQ:QQV ratio above is one facet that also shows us what is
either a significant top, or the beginning of a major trending
move.   On a scalp basis, the question is almost moot, as there's
enough motion between the Bollinger bands to keep the account
growing.  On a swing or position basis, I think it's pretty clear
where stop losses should go on new short plays.  On existing
swing and position long plays, the lower ascending trendline is
also clear and should serve as a guide for trailing stops.

I observed that the put to call ratio never spiked higher today,
despite the virtually perfect repeat of yesterday's morning
session this morning.  Bears everywhere have become confused,
frustrated, and insecure, while bulls are becoming trigger-happy.
To my mind, this sets up excellent conditions for a serious test
of the lower trendlines- significant declines don't happen from
areas where everyone is feeling bearish.  One item of concern
throughout this rally has been the readiness of the put to call
ratio to spike on the slightest suggestion of downside.  Today,
this failed to occur for the first time in weeks.

For tomorrow, we can expect more of the same.  The full slate of
economic reports couldn't shake up the indices, and perhaps this
was the effect of opex week "strike pinning" at work.
Tomorrow's session will tell the tale.


Weak enough to choke a horse.  But feed a bull?

Part of my weeklong vacation was spent in western Kansas, and
while that may sound as if it's an obscure place to take a
vacation, but there was some excitement to be had.

Tornado warnings and high winds kept me indoors one afternoon,
and when I got back from Kansan, I was wondering if I actually
got caught up in never-never-land as today's economic news looked
weak enough to choke a horse, but as has been the case in recent
weeks, not weak enough to unsettle a bull's appetite for stocks
as the major indexes all finished in positive territory.

The closing values of the indexes looked to me as if I hadn't
missed much, with the major exception being Treasury bond YIELDS,
which have continued to fall with the weaker dollar.  On the
surface, there was little change in the equity indexes, but the
market internals continue to strengthen as depicted by the
bullish % readings, which have all moved higher.

While I didn't see any other Turkey hunters (note the difference
between hunters, not getters) on the western plains of Kansas,
market volumes have tapered off notably in the past week as if
other traders took the week off in a last chance effort to bag a
tom turkey before season's close.

While volumes have been tapering off from last week's levels,
today's plethora of economic reports did have NYSE volume back
above the 1.4 billion market a 1.43 billion shares.  After two
session of breakeven and fractionally negative breadth, advancers
outnumbered decliners by a 5 to 3 margin.  After Monday's 290 52-
week highs, today's 254 new 52-week highs is the second highest
total of new highs so far this year, and many months.  Only 4
stocks hit new lows on the NYSE.

NASDAQ volume came in at 1.95 billion in today's session and
after two sessions of unchanged breadth (16:16 and 15:16)
advancers outnumbered decliners by a wider 3 to 2 margin in
today's trade.  New highs/versus new lows were nearly identical
to yesterday (205:8) at 200 to 10 by session's end.

Weakness in European GDP quarterly data gave a boost to the
dollar in today's session with the U.S. Dollar Index (dx00y)
95.31 +0.77% gaining 0.73 points and action here hints that some
assets flowed back toward the U.S. on what looked to be thoughts
that as weak as the economic data is in the U.S. there has at
least been some modest quarterly GDP growth compared to European

Today's economic data, which raised concerns regarding
"deflation" as prices at the producer level fell got a mixed
reaction from bond traders.  The shorter-dated June 5-year
Treasury Futures contract (fv03m) 115'055 -0.16% fell 6/32 with
YIELD ($FVX.X) 2.533% rising 4.3 basis points to 2.533%, while
the longer-dated June 30-year Treasury futures contract (us03m)
118'13 did trade a new contract high at 119'05 before edging back
into its close, but still finishing up a full point with YIELD
($TYX.X) 4.492% spiking to another multi-year low of 4.43% during
today's session and closing out with a 4.492% YIELD.  If you're
in the market for a refinancing of a mortgage or looking to lock
in a rate, now would be a good time to pick up the phone and call
your mortgage broker.  The benchmark 10-year YIELD ($TNX.X)
finished unchanged at 3.537%.  In all, today's action had a
flattening effect on the YIELD curve, and helped keep stocks in
the green for the bulk of today's session.

I must admit, for a supply/demand trader, this past week's
dollar/bond action has be scratching my head.  I received several
e-mails while I was out regarding just why the major indexes were
not falling apart with such strong buying in the Treasuries and
selling in the Dollar.  The ONLY explanation from the
supply/demand side that I can come up with is that with money
market rates now at just over 1%, there has got to be some money
coming in from shorter-term cash accounts that is looking to play
the momentum that not only bears can't explain, but many longer-
term bulls as well as some company's CEO's seem to be having
trouble confirming with their own internal business trends.

I spent yesterday afternoon trying to get my WEEKLY pivot
analysis matrix updated and see just what type of levels had been
traded, as well as the prior week's matrix.  As noted in previous
commentary, it has been several weeks since a WEEKLY S1 has been
traded in the equity indexes and that holds true into today's
close, with buyers lurking at the WEEKLY pivots (last week and
this week).

Pivot Analysis Matrix

The day before I left on vacation, I profiled and added in my own
account another partial position put in the QQQ and continue to
hold 1/2 bearish position.  I monitored the QQQ today's at its
MONTHLY R1 of $28.59 and while the QQQ did trade a low of $28.56
(highlighted in pink) all be darned if you could get a 5-minute
bar close below that level as each 5-minute closed on three
separate intra-day tests didn't find enough buying to hold the
QQQ above that level.  As we will note later today, the WEEKLY
pivot analysis retracement has a zone of support from $28.62-
$28.65 from combination MONTHLY and WEEKLY pivot retracement.
I'm also noting that the WEEKLY pivot of $28.36 was tested to the
penny on yesterday at its session low.  The intra-day chart of
the QQQ shows the WEEKLY pivot and WEEKLY R1 definitely in play
as support/resistance levels being traded.

The S&P 100 Index (OEX.X) 477.68 +0.78% is the only equity index
yet to trade its MONTHLY R1 and I perhaps can see a tie with the
S&P Banks Index (BIX.X) 296.93 +0.59% not able to trade its
MONTHLY R1.  I can't say that I see this as being bearish at this
point, but make some notes here.  If the BIX.X can make the break
above 299-300 (correlative resistance in WEEKLY R1 and MONTHLY
R1) and tomorrow's DAILY R2, then that action should have a
bullish impact on both the SPX and OEX.

One thing I made note of last night while I was updating the
WEEKLY pivot analysis matrix was the narrow range from S2-R2.  I
went back to when I first started "saving" these weekly pivots
and the equity index ranges are very narrow.  I do need to go
back and see if this really means anything at this point and
after I get done with tonight's wrap, I'm going to go back and
put together some WEEKLY pivot levels.  With the bullish % charts
nearing more "overbought" historical levels, I want to see if
there may be a tie with a "tight range" and the higher bullish%,
as if computers are starting to "narrow down" some type of range
before a reversal lower, which the higher levels of bullish %
might be alerting us to some type of "risk management" trade
where some type of profit selling would be expected and removal
of risk being had in the major indexes.  Again.... I need to go
back, see if there was a tight range developed, and if so, what
"level" (was it a WEEKLY S1 or S2 that was traded) to then
perhaps signal a more meaningful pullback.

NASDAQ-100 Tracking Stock (QQQ) - 10-minute intervals

The NASDAQ-100 Bullish % ($BPNDX) is at 77% and unchanged after
today's trade.  This is the same level of bullish % as when I
took off for vacation, yet the QQQ is up $0.31 from its May 6th
close.  The 10-minute interval chart allows us to look at the QQQ
and see how the WEEKLY range is being "defined" by the WEEKLY
pivot of $28.36 and WEEKLY R1 of $28.95.  As "awful" as today's
economic reports were, the QQQ wouldn't break its MONTHLY R1
(dashed pink).  While I'm more "bearish" the QQQ based on the
higher level of bullish % and risk runs high for bullish traders,
the still forming pattern of higher lows and equal highs at
WEEKLY R2 of $28.95 builds some pressure, that an upside break at
$29.06 could have further unraveling to the upside with targets
of $29.50 and MONTHLY R2 of $29.73.

For traders holding a QQQ Sept. $27 or $28 put, I would not be
opposed to holding those puts, but creating a bit of a near-term
"hedge" and a bullish position in the underlying QQQ itself on a
break above $29.06, with the idea of selling the underlying QQQ
bullish position up near $29.50-$29.73.  With the bullish % at
77%, my thinking is we're closer to a near-term "top" on the QQQ
than we are a bottom, but the Q's are susceptible to good short-
covering rallies and I think momentum bulls are playing the moves
higher and will continue to do so until some type of loss is

S&P 500 Index Chart (SPX.X) - 5-point box

A pattern of 3-box reversals (3 O's) after a new relative high
has been developing over the last month and after a 15-point
pullback, demand (X) has outstripped supply.  Just as the
narrower and more volatile NASDAQ-100 Bullish $ ($BPNDX) has
reached well above the 70% level, the same could be true for the
S&P 500 Bullish % ($BPSPX), which today saw the bullish % grow to
67.6% and see a net gain of 1.2% (6 new PnF buy signals).  I'd be
more tempted to play the SPX bullish on a pullback to 930 as
bullish, follow with a stop at 915, which would be a double-
bottom sell signal, and with internals still strong and adding
new buy signals, look for a new relative high.  I would use the
higher levels of bullish % to begin limiting new bullish
positions to partial and not full positions.

S&P 100 Index (OEX.X) Chart - 2.5-point box

Today's action saw no net change in the S&P 100 Bullish %
($BPOEX) and this indicator for internal breadth on a PnF basis
has been stuck at 65%, since Friday's close.  We've noted in the
past that the OEX has tended to trade back off of our "bullish
resistance" trend (upward trending pink trend).  It is somewhat
"rare" to see the broader S&P 500 bullish % exceeding the
narrower S&P 100 Bullish % ($BPOEX) and this is a sign of near-
term caution, but also a point to look for the larger capped OEX
to try and play some catch up.  A pullback to 470 or 467.50
offers a bull a good risk/reward entry with a stop at 465 on the
PnF chart, which would be a double-bottom sell signal, which is
also just under this WEEK's S1, which we haven't seen a test of a
WEEKLY S1 in several weeks.  My thinking right now is if the
NASDAQ Composite and NASDAQ-100 Index can trade their December
highs, then if the MARKET truly is discounting the weak economic
data as a lagging indicator on the "war with Iraq" still working
itself off, then the OEX should have a shot at its December highs
of 487.94.

Dow Industrials (INDU) Chart - Daily Intervals

While the Dow Industrials did trade its WEEKLY R2 on Monday, I
should note that this WEEKLY R2 is just below the prior WEEK's R2
of 8,781.9, and I'm noting that the WEEKLY R2's have been moving
up, then down, then up, then down in recent weeks.  I point this
out so that I don't get the "false impression" that the Dow is
trading stronger within its WEEKLY pivot.  Still, the Dow has
been able to "eat through" many levels of resistance, including
its 19.1% retracement from conventional retracement.  In my last
Index Trader's wrap before I went on vacation, I discussed the
possibility that we might see some type of "rotational benefit"
of bullishness toward the Dow Industrials.

Well... the QQQ has tacked on an additional 1.27% gain since last
Tuesday, but the Diamonds Trust (DIA) $87.32 hasn't done too bad
with a 1.59% gain since last Tuesday.

My thinking here, based on observation is that new money being
put to work, may indeed be playing a bit of risk/reward and
looking for some Dow catch up.

While I was gone, the Dow Industrials Bullish % ($BPINDU) saw a
net gain of 3 stocks to new point and figure buy signals to
66.66% and has been stuck at this level of bullish % for the past
5 sessions (including today).

In late November, the Dow Bullish % ($BPINDU) rose to 72% before
reversing lower, so here too, we're getting to a higher risk
level for new bullish entries.  There are less "2003 profits" to
roll out of the Dow at this point, compared to the other indexes,
and would still be my "preferred" index to trade bullish at this
point on thoughts of an economic recovery.

Jeff Bailey

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Chiming In
- James Brown

At this point bearish traders are probably labeling investor
sentiment as delusional.  The markets have continued to shrug off
bad news and completely focus on any bits of good news it can
uncover.  Fortunately, today, there were plenty of positive
headlines for bulls to latch on to.  Last night and this morning
there were a number of positive earnings reports that fueled
heavy gains in the software sector.  The weekly jobless claims,
while still too high, were less than expected.  The NY business
sentiment number rebounded strongly from a -20 to a +10, much
higher than the expected -8 reading.

Wall Street completely overlooked the weak capacity utilization
numbers in favor of positive comments from IBM's CEO that the IT
industry appears to have "stabilized".  Intel's CEO also chimed
in with optimistic comments about the future.  This had the GHA
hardware index and the SOX index making gains.

Even the brokerage sector contributed to the rally with Charles
Schwab reporting stronger trading volumes in April and a good
showing for May thus far.

Market internals were positive with advancing stocks out
performing declining stocks almost 18 to 10 on the NYSE and 18 to
12 on the NASDAQ.  New 52-week highs crushed new lows 430 to 18.
It seems like every time we look at this number the new lows keep
getting smaller.  Probably the most impressive was how up volume
beat down volume 1,214M to 547M on the NYSE and 1,259M to 657M on

The volatility indices continue to sink but investors don't care,
which is exactly why they are falling.  Low numbers in the VIX
and VXN show a lack of fear and growing complacency.  That's
usually a recipe for a market top.  Professional market watchers
all seem to agree that short-term the markets are all overbought
and need to pull back but the longer-term bullish camp is
counting new recruits almost daily.

I'd guess that tomorrow could be another positive Friday if you
looked at how so many of the major sector indices closed but the
crystal ball is a little muddy if we'll be able to maintain any
gains into the close.

There are too many stocks that have gone too far and we'd be
loath to chase them so trade what you see and keep your stops


Market Averages


52-week High: 10353
52-week Low :  7197
Current     :  8713

Moving Averages:

 10-dma: 8613
 50-dma: 8275
200-dma: 8326

S&P 500 ($SPX)

52-week High: 1107
52-week Low :  768
Current     :  947

Moving Averages:

 10-dma:  935
 50-dma:  885
200-dma:  883

Nasdaq-100 ($NDX)

52-week High: 1351
52-week Low :  795
Current     : 1163

Moving Averages:

 10-dma: 1145
 50-dma: 1071
200-dma: 1004


Another day, another step lower in the VIX to that looming "20"
level where market tops tend to occur.

CBOE Market Volatility Index (VIX) = 21.67 -1.09
Nasdaq-100 Volatility Index  (VXN) = 32.18 -0.96


          Put/Call Ratio  Call Volume   Put Volume

Total          0.64        818,442       522,586
Equity Only    0.52        569,227       293,715
OEX            1.04         41,208        43,032
QQQ            0.59         35,210        20,933


Bullish Percent Data

           Current   Change   Status
NYSE          59.0    + 1     Bull Confirmed
NASDAQ-100    77.0    - 2     Bull Confirmed
Dow Indust.   66.7    + 0     Bull Confirmed
S&P 500       67.6    + 2     Bull Confirmed
S&P 100       65.0    + 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  0.76
10-Day Arms Index  0.99
21-Day Arms Index  1.05
55-Day Arms Index  1.25

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


Market Internals

            -NYSE-   -NASDAQ-
Advancers    1789      1808
Decliners    1064      1252

New Highs     220       215
New Lows       13         7

Up Volume   1215M    1263M
Down Vol.    548M     659M

Total Vol.  1784M     1951M

M = millions


Commitments Of Traders Report: 05/06/03

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

We knew it would be a quiet week on Wall Street last week,
aside from the FOMC meeting, and we see little change in
the Commercial's net-long stance.  There has also been little
change in the Small Trader's net long stance either.

Commercials   Long      Short      Net     % Of OI
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%
05/06/03      429,519   419,545     9,974     1.2%

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
04/15/03      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%
05/06/03      150,345   148,681     1,664      0.6%

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

It is the e-mini positions that we are seeing some shifts.
The Commercials have bumped up their longs by more than 30K
while reducing their shorts by about 25K.  Looks like money
is shifting sides here.  Small Traders have also shown a
small reversal with longs decreasing by almost 40K and shorts
jumping by more than 10%, but they remain significantly
net long while Commercials are exceedingly net short.

Commercials   Long      Short      Net     % Of OI
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%)
05/06/03      169,388   447,330   (277,942)  (45.1%)

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
04/15/03      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%
05/06/03      423,918    55,932   367,986    76.7%

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


It's pretty much dead-even on the Commercials positions
on the NDX.  Meanwhile the Small Trader has increased their
position sizes in both longs and shorts.

Commercials   Long      Short      Net     % of OI
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    9.6%
05/06/03       46,327     38,216     8,111    9.6%

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
04/15/03       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%)
05/06/03       13,482    21,010   ( 7,528)  (21.8%)

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


Again we're not seeing any big shifts of money or attitude
in the Commercials or the Small Traders.  The "smart" money
is still net long the Industrials and the small guy is just
barely net short.

Commercials   Long      Short      Net     % of OI
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%
05/06/03       16,772    13,568    3,204      10.6%

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
04/15/03        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%)
05/06/03        7,829     8,642    (  813)   ( 4.9%)

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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Hitesh P. (John) Adhia: Adhia Twenty (ADTWX)

This week we put Hitesh P. (John) Adhia and the Adhia Twenty Fund
(ADTWX) under the manager microscope.  John Adhia, a CPA, started
his own investment management firm, Adhia Investment Advisors, in
1997 in order to provide investment advisory services for clients
of his CPA practice.

After a few years of managing individually structured portfolios,
the Adhia Twenty Fund (ADTWX) was launched in 1999.  The fund is
meant for individuals who want to participate in the expertise of
the firm, but don't have the minimum investment needed to build a
privately managed portfolio.  Adhia Twenty Fund utilizes the same
investment philosophy and process that the firm uses in the daily
management of separate accounts, but requires just $2,000 to open
a regular account ($1,000 if you invest through an IRA).

According to Morningstar's report, the tiny, $2 million Adhia 20
Fund isn't widely available through fund brokerage networks.  It
lists Accutrade as the only participating brokerage network.  So,
if you like this fund, you'll want to explore your fund purchase
options with an Adhia Funds representative (their toll free # is
800-627-8172).  You should be able to purchase the fund directly
through the Adhia Funds if there are no other channels available.

Manager Style/Strategy

The primary investment objective of the Adhia Twenty Fund is to
provide long-term capital appreciation through investment in 15
to 25 stocks.  For defensive purposes, the fund may also invest
in money market funds to defend capital in periods of declining
equity prices.  For example, John Adhia had just 60.7% of total
assets invested in common stocks at December 31, 2002, with the
remainder invested in the Fidelity Cash Reserves Fund.

Stock holdings are chosen based on fundamental factors such as
book value, price to earnings ratio, price to sales ratio, the
cyclic nature of industry involved, management reputation, etc.
In addition, John Adhia considers technical indicators such as
stock momentum, changes in volume, comparison of current stock
price to its 200-day moving average, etc. as secondary factors.

Sell decisions are the result of continuous research, they say,
with each holding monitored relative to the firm's expectations.
A stock may be sold if its fundamentals change, its price nears/
exceeds its valuation limit, or the stock is replaced by another
security of greater potential.

According to the Adhia Funds website (www.adhiafunds.com), the
Adhia Twenty Fund does not intend to purchase stocks for short-
term trading purposes.  The fund is non-diversified; meaning it
may invest a greater percentage of total assets in John Adhia's
favorite stocks.  At year-end, the fund's top holdings included
chemical/industrial giant Du Pont (10.2%), healthcare/drug firm
Allergan Inc. (8.7%), and consumer product maker Kimberly Clark

Because of its tiny asset base, expenses as a percentage of net
assets are higher on the Adhia Twenty Fund than similar, larger
funds.  At 1.92%, the fund's expense ratio is considerably more
than the Morningstar large-blend category average, putting John
Adhia at a competitive disadvantage.  Hopefully, with the Adhia
Twenty Fund doing relatively well in 2003, net assets will grow
and the fund's expense ratio will come down; but for now, it is
something to keep in mind.

Manager Performance

In 1999, Adhia Twenty Fund's first full year of operation, John
Adhia produced an annual return of 29.8% for investors, ranking
the fund in the top 14% of the Morningstar large-blend category.
Adhia's performance that year outperformed the S&P 500 index by
8.8% and the large-cap blend category average by 10.1%.  In the
year 2000, Adhia Twenty Fund lost just 2.1%, compared to annual
losses of 9.1% and 5.1%, respectively, by the S&P 500 index and
large-blend category average.

In years 2001 and 2002, John Adhia continued to outperform both
the market (S&P 500 index) and the large-blend category average,
doing a good job of preserving capital.  Although the fund lost
3.1% and 16.1%, respectively, it ranked in the top decile (10%)
of the Morningstar large-cap blend category in both years.  The
S&P 500 index benchmark lost 11.9% in 2001 and tumbled 22.1% in

This year, Adhia Twenty Fund is up 8.4% on a year-to-date basis
through May 14, 2003, ranking in the category's 13th percentile,
per Morningstar.  Adhia's 8.4% YTD return is 0.6% more than the
YTD return of the S&P 500 index benchmark.  So, while this fund
doesn't have five years of performance history, you can look at
what Adhia has done this year and what he did in 1999, two time
periods in which stocks advanced; and you can look at how Adhia
fared in 2000, 2001 and 2002, three time periods in which stock
prices fell.

In each year since the fund's inception (1999, 2000, 2001, 2002
and 2003 YTD period), John Adhia has beaten the S&P 500 and the
large-blend average.  It comes as no surprise then to find that
the Adhia Twenty Fund is a "Lipper Leader" for Total return and
Preservation (see www.lipperleaders.com).  According to Lipper,
Adhia has excelled at building wealth and protecting principal
over the trailing 3-year period.

For the trailing 3-year period through May 14, 2003, the Adhia
Twenty Fund generated a negative average annual return of 5.8%.
However, that shaved about half off the annualized loss by the
S&P 500 index during the period and was good enough to rank the
fund in the top 9% of the Morningstar large-cap blend category.
Unless the fund trails off significantly in the second half of
2003, it'll likely receive a 5-star rating for trailing 5-year
performance.  January 1, 2004 will mark the fund's anniversary,
so check back then if you prefer to wait until you can compare
trailing 5-year returns, rankings and ratings.


The Adhia Twenty Fund hasn't reached its 5-year anniversary yet,
but is making a solid case for itself since it began operations
on January 1, 1999.  Portfolio manager John Adhia has shown that
he can capture returns in rising markets (1999, YTD 2003) and in
down markets (2000, 2001 and 2002) can reduce losses relative to
category peers and the market as a whole.

However, red flags include the fund's tiny assets of $2 million
and its relatively high expense ratio, 1.92%.  In the future it
could be different - assuming fund assets grow - resulting in a
lower annual expense ratio.  Fund assets have already gone from
below $1 million at year-end 2002 to about $2 million today, so
there's room to be hopeful, especially if the fund becomes part
of a popular no-load NTF network like Charles Schwab OneSource.

For more information or to download a fund prospectus, visit the
Adhia Funds website at www.adhiafunds.com.

Steve Wagner
Editor, Mutual Investor

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Contact Support
The Option Investor Newsletter                 Thursday 05-15-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls:     ADTN
Dropped Puts:      KSS
Daily Results
Call Play Updates: AGMN, IBM, KLAC
New Calls Plays:   none
Put Play Updates:  AIG, GS, PG
New Put Plays:     MTG


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.


ADTRAN, Inc. - ADTN - close: 43.43 change: -1.69 stop: 45.00

We certainly hope you heeded our advice to harvest gains on ADTN up
near the $47 level earlier this week.  After failing to follow
through to the upside, the stock dropped back a bit more on
Wednesday, ending just above our $45 stop.  At that point, it could
have gone either way and all things being equal, the stock would
have likely gotten another bounce today.  But all things weren't
equal (they seldom are), as news broke that the company's Chairman
and CEO had sold 4 million shares of company stock (about a third
of his total holdings) and that news did not sit well with
investors.  They followed suit, driving the stock down as low as
$42.50, before the stock rebounded from the ascending trendline to
close just above the mid-point of its intraday range.  Clearly our
$45 stop was violated with the gap down to just above $44 and we've
no choice to drop coverage of the play tonight.  The moral of the
story is, in a market like this, take profits when they are

Picked on April 29th at  $40.70
Change since picked:      +2.73
Earnings Date          07/15/03 (unconfirmed)
Average Daily Volume = 814 K


Kohl's Corp. - KSS - close: 53.02 change: -0.66 stop: 55.25

This has got to be one of the most volatile successful plays we've
featured in quite some time.  Each selloff has been met by eager
buyers and traders that entered on breakdown's under support really
had to take some heat.  But in the end, KSS solidly gave up the
$54-55 support level and on more than one occasion, provided
opportunities to harvest gains in the $51-52 area we originally
targeted.  But as we've been noting in the recent updates, this
party is over.  KSS announced earnings (in-line) tonight after the
close and as advocated recently, all positions should have been
closed before tonight's closing bell.  Odds are KSS will find its
way back onto the Put list in due time, but now it's time for a

Picked on April 27th at $55.02
Change since picked:     -2.00
Earnings Date         05/15/03 (confirmed)
Average Daily Volume = 4.06 mln


Please view this in COURIER 10 font for alignment

CALLS    LAST      Mon    Tue    Wed   Thu  Week

ADTN     43.43   1.82  -1.08 -0.79 -1.69 DROP, insider selling
AMGN     62.63   0.75  -0.49 -0.14  0.78 Looks good
IBM      89.90   1.45   0.98 -0.30  1.20 Near 52-week highs
KLAC     41.97   1.30  -0.88 -1.06  0.43 One more day
MEDI     35.84   1.10  -0.13  0.13  0.89 Long-term, no update


AIG      57.31   0.10  -0.73  0.31  0.85 Untriggered
GM       34.88   0.72  -0.39 -0.34 -1.03 Broke $35.00
GS       76.10   0.49  -0.54 -0.05  1.15 Cautious
KSS      53.02   2.80  -0.56 -0.81 -0.66 DROP, earnings
PG       89.90  -0.37  -0.94  0.11  1.30 Untriggered

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Amgen, Inc. - AMGN - close: 62.63 change: +0.78 stop: 59.25*new*

Leading the NASDAQ in its relentless climb up the charts, the
Biotechnology index (BTK.X) is moving higher by leaps and bounds,
scaling the $402 resistance level on Thursday, for the first time
in 11 months.  As one of the largest components of the BTK, AMGN
has been doing its share to help the index advance, although DNA's
4% gain on Thursday certainly didn't hurt.  After the rebound from
just above the $59 level last week, is persistently climbing
higher, after consolidating near the $62 level.  The only concern
is that volume has been rather light, coming in at only about 60%
of the ADV on Thursday despite nearly 2 billion shares changing
hands at the NASDAQ.  Concrete support seems to be building near
the $61 level and an intraday pullback near that level would make
for a decent entry point.  We're still being cautious in advancing
our stop, inching it up to $59.25 tonight, which is just below both
the 50-dma ($59.50) and last Thursday's intraday low of $59.35.

Picked on May 11th at    $61.24
Change since picked:      +1.39
Earnings Date          07/22/03 (unconfirmed)
Average Daily Volume = 10.3 mln


Intl Business Mach - IBM - cls: 89.90 chg: +1.20 stop: 86.89*new*

As Jon likes to say in the OptionInvestor.com MarketMonitor, this
Teflon market just won't go down.  That's just fine with tech
stock bulls.  Positive comments from IBM's management at an
investor conference today lifted shares of IBM and the hardware
sector.  IBM's CEO offered some cautiously optimistic comments
about the computer industry and shares inched closer to another
potential breakout over the $90 level.  The stock has been
showing some decent relative strength and we're going to raise
our stop to $86.89.  At this point entries are best considered on
a pull back to $87.00 or a breakout over $90.00.

Picked on May 4th at $87.37
Change since picked:  +2.53
Earnings Date      04/14/03 (confirmed)
Average Daily Volume = 8.2 Million


KLA-Tencor - KLAC - close: 41.97 change: +0.43 stop: 40.95

We're going to hold on to KLAC for one more day to see if it can
rebound off the bottom of its short-term channel.  The chip
sector has been suffering from downgrades and a less than
optimistic earnings call from AMAT on Tuesday.  Despite this
negative pressure the SOX looks ready to breakout above the 360
level and hit new five month highs.  KLAC needs to get it in gear
and it might if the SOX out performs again.  While we are very
cautious on the stock (KLAC) right here, it does offer a
relatively low-risk entry given our suggested stop loss at
$40.95.  If we don't see some positive performance tomorrow we'll
probably close this play.

Picked on May 4th at $42.15
Change since picked:  -0.18
Earnings Date      04/23/03 (confirmed)
Average Daily Volume = 11.4 Million



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American Intl Group - AIG - cls: 57.31 chg: +0.85 stop: $58.00

There's nothing like a little corporate spin to alter the course
of a trade.  Previously AIG had stated that the SARS outbreak in
Asia would dampen sales as its salesmen would not be able to
reach clients until the illness was brought under control.  AIG
earns about 30% of its revenues from the Asian region.  The
latest spin on the SARS impact on Asia came from Mr. Greenberg,
AIG's CEO, who spoke to shareholders on Wednesday.  Greenberg was
quoted as saying "Longer term, the SARS scare will be the biggest
boost to sales of life insurance and related products [in the
Asian region] that I can think of..."(Reuters).  Shares of AIG
have been bouncing between $55.25 and $56.50 for five days before
today's 1.5% gain.  Shares still have very significant resistance
at its 200-dma directly overhead and aggressive bears could enter
positions here with a stop at $58.50 but we continue to wait for
a move under $55.00.  Let me reiterate OptionInvestor.com remains
UNTRIGGERED until AIG can trade at or below $54.94.

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: 76.10 change: +1.15 stop: 78.25

Regardless of what the fundamental picture is for the Brokerage
sector (XBD.X), buyers have been active in this area of the market
this week, especially on Thursday.  The index vaulted through the
$465 resistance level to post a 3.62% advance.  This sector
strength does not bode well for our bearish play on GS, which
caught a mild bounce of its own today, moving back over the $76
level at the close.  The rolling lower 20-dma ($76.19) seemed to
provide some mild resistance, but the real test will come near the
descending trendline from the April highs, which currently sits
just above $77.  The bears will need to defend this resistance
level or this play will be toast.  A rejection from that trendline
looks like a solid entry point into the play, but keep in mind that
a rally right through that trendline will likely have us dropping
the play due to a more bullish looking chart.  We're maintaining
our stop at $78.25

Picked on May 8th at    $74.06
Change since picked:     +2.04
Earnings Date         06/19/03 (unconfirmed)
Average Daily Volume = 4.23 mln


Procter & Gamble - PG - close: 89.90 change: +1.30 stop: 90.00

Sometimes it is much more evident why we use triggers on some
plays and why we don't.  Shares of PG had fallen under the $88.00
level on Tuesday, which had been support, but they stopped short
of breaking its simple 200-dma.  We listed a trigger to open
bearish positions at $87.45 just in case dip buyers bought PG at
"support" of its 200-dma.  Sure enough... PG opened higher on
Wednesday, pulled back to the 200-dma again and then rebounded
strongly.  The rebound continued much more forcibly in Thursday's
session and the stock closed just short of its $90.00 level.
That's okay.  We're a patient bunch.  If PG wants to vacillate
between $88 and $90 for a couple of more days we'll wait.
However, if PG closes above the 91.00 mark we'll close this yet
to be opened play.  Meanwhile super aggressive bears could
attempt to short PG here at $90 (to $91) with a tight stop but we
wouldn't recommend it.  OptionInvestor.com remains UNTRIGGERED.

Picked on May Xth at $00.00
Change since picked:  -0.00
Earnings Date      04/28/03 (confirmed)
Average Daily Volume = 3.3 Million


MGIC Invest. Corp. - MTG - close: 45.21 change: -1.41 stop: 48.50

Company Description:
MGIC Investment Corporation is a holding company that, through
its wholly owned subsidiary, Mortgage Guaranty Insurance
Corporation (MGIC), is a provider of private mortgage insurance
coverage in the United States to the home mortgage lending
industry.  Private mortgage insurance covers residential first
mortgage loans and expands home ownership opportunities by
enabling people to purchase homes with less than 20% down
payments.  Private mortgage insurance also facilitates the sale
of low down payment mortgage loans in the secondary mortgage
market, principally to the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation.

Why we like it:
With all the concerns that have been aired about a potential
bubble in the Housing market or in the Mortgage market, investors
have apparently scaled that wall of worry and propelled the Dow
Jones Home Construction index ($DJUSHB) back to the dizzying
heights near $400, also right at the site of the all time highs.
Lenders don't seem to be having problems, as their stocks push
higher as well.  It is no great surprise either, with bond yields
charging to their lowest levels in 45 years yesterday.  But there
is one possible wrinkle in this smooth sea of prosperity.  Most
mortgages are being initiated with less than the requisite 20%
down, meaning that private mortgage insurance is required to
protect the lenders.  A major player in the field is MTG, and
judging by the recent price action, something doesn't smell quite

The stock has been persistently rejected from the $48.50
resistance level since last October and we just recently saw a
double-top just below that level.  Bearish Stochastics divergence
started showing up on the daily chart in early May, and that
early warning seems to have been confirmed today with the
breakdown under the 20-dma ($46.06), which had been providing
support since the middle of March.  The stock did find intraday
support today at $44.40, which just happens to coincide with the
ascending trendline from the March lows.  The real tell was the
heavy volume that accompanied today's selloff, more than double
the ADV.  That seem to indicate the stock could be entering a
distribution phase as investors begin to worry about the
potential for rising mortgage default rates, with the economy
still not showing the strength necessary to support the notion of
a healthy recovery.  Daily Stochastics are already bearish, MACD
is just starting to tip over and MTG is right on the verge of
breaking significant support.

Momentum traders can wait for a break below the $44 level before
entering the play, while more conservative traders will want to
look for a failure after today's rebound from the lows.  Should
that rebound be weak (as we expect it will be) a rollover from
the vicinity of $46 looks favorable, although a rejection from as
high as $47 would still look attractive.  The initial downside
target will be $42, which is just below the 50-dma.  Should the
bears really get serious though, a trip back down to solid
support at $40 could be in the cards.  Our stop is initially set
at $48.50.

Suggested Options:
Short-term traders will want to focus on the June 45 Put, as it
will provide the best return for a short-term play.  Those
looking for a larger move down towards the our $40 target will
want to utilize the September 45 Put, which provides greater
insulation from the spectre of time decay.  Note that the open
interest is largest on the June 45 strike, so that one will
likely provide the best liquidity.

BUY PUT JUN-50 MTG-RJ OI=  4 at $5.40 SL=3.50
BUY PUT JUN-45 MTG-RI OI=458 at $2.15 SL=1.00
BUY PUT SEP-45 MTG-UI OI= 80 at $3.90 SL=2.50

Annotated Chart of MTG:


Picked on May 15th at    $45.21
Change since picked:      +0.00
Earnings Date         07/15/03 (unconfirmed)
Average Daily Volume = 1.02 mln

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The Option Investor Newsletter                 Thursday 05-15-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Play of the Day: IBM
Traders Corner: Know When To Hold 'Em -- Know When To Fold 'Em


Intl Business Mach - IBM - cls: 89.90 chg: +1.20 stop: 86.89*new*

-Company Description-
Big Blue is being heralded as the world's largest technology
company. Considering their massive hardware and software business
across the globe it's not surprising. However, IBM's services and
consulting business is growing by leaps and bounds and is a major
source of revenues.

- Most Recent Update (Thursday, May 15, 2003)-
As Jon likes to say in the OptionInvestor.com MarketMonitor, this
Teflon market just won't go down.  That's just fine with tech
stock bulls.  Positive comments from IBM's management at an
investor conference today lifted shares of IBM and the hardware
sector.  IBM's CEO offered some cautiously optimistic comments
about the computer industry and shares inched closer to another
potential breakout over the $90 level.  The stock has been
showing some decent relative strength and we're going to raise
our stop to $86.89.  At this point entries are best considered on
a pull back to $87.00 or a breakout over $90.00.

- Play of the Day Comments -
We're listing IBM as the play of the day for Friday for two
reasons.  Should the stock pull back to the $88.00 or $87.00
level and bounce then traders could use the dip as an entry for
new positions using a tight stop (as suggested).  On the other
hand, if IBM breaks out above $90.00, then a move over this very
significant resistance could have shorts covering in droves and
drive the price higher at an even faster clip.

- Suggested Options -
We listed mostly 90-strike options but that reflects our
expectation of a breakout above the 89-90 level. It would not
hurt to use the 85 strikes on dips or if you can afford them.

BUY CALL JUN 85 IBM-FQ OI= 8238 at $6.00 SL=3.50
BUY CALL JUN 90 IBM-FR OI=14018 at $2.60 SL=1.50
BUY CALL JUL 90 IBM-GR OI=32927 at $3.90 SL=2.00
BUY CALL OCT 90 IBM-JR OI= 7876 at $6.30 SL=3.50

Annotated Chart of IBM

Picked on May 4th at $87.37
Change since picked:  +2.53
Earnings Date      04/14/03 (confirmed)
Average Daily Volume = 8.2 Million

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Know When To Hold 'Em -- Know When To Fold 'Em

By Mike Parnos, Investing With Attitude

The market tends to humble investors.  That's why, at the CPTI,
we're not investors – we're TRADERS.  For the last three years,
investors have taken on a different appearance.  They have less
hair, bottles of ulcer medication, thinner wallets and will have
to serve fries well into retirement.

What separates traders from investors?  In the Navy they call it
"Duck & Cover."  In certain neighborhoods it's called "hit the
road, Jack."  In life it's called "filing for divorce." In poker
it's called "knowing when to fold 'em." In the markets we call it
"cutting your losses."

This month, the market isn't cooperating.  Are there steps to
take?  Baby steps?  Giant steps?  CPTI students are making moves.

Hello Mike,
I have been paper trading the CPTI trades every month and last
month I decided I was ready to commit real money.  I finally
reached my breaking point this afternoon and closed out the three
trades I had.  All three trades (DJX, SMH, MSFT) were flirting
with their break-even points early on.

Because I'm such a novice, I spent less time on the couch and more
time in front of my trading screen giving considerable thought
about what to do.  My rationale was that there was a lot of time
value left on the options. I figured the time value would erode
and since the market appeared to be overbought and should pull
back I decided to stay in all three trades.

Today, I closed out all three trades today and ended up with a
$400 gain overall.  While I'm not knocking any gain at any time,
I'm sure you know I had hoped for better.  So, here is my
question: Do you get out of the trades when they cross over their
break even points, or do you take other factors into consideration
as well?  Was my rationale for staying in the trades sound or
should I have done something different?  I gave much thought to
hanging onto MSFT and SMH until the bitter end and my reason for
closing them today was more emotional than anything else.  I
figured a bird in the hand (even though it was a very small bird)
was better than one in the bush.  I'd really like your input.  As
always, thanks for your help.

There's nothing wrong with taking your profits.  Ideally, we want
to trade without emotion.  But, easier said than done.  It's true
that we're getting down to the short and curlies on these trades.
The premium is eroding away.  Hopefully, the market will continue
on down.  It doesn't have to go down too much for the DJX, MSFT
and SMH trades to work out.  The SPX has a decent chance of
success too.

If you look at a position you've entered, and you don't like where
it is, you may want to make an adjustment.  Remember, when we
establish these ranges, we're accepting the fact that the
underlying is going to bounce around and will hopefully adhere to
the resistance and support levels.  You can even take advantage of
the trading swings by buying back far out of the money short
options and freeing up margin dollars for other trades, etc.

If you wouldn't enter a new trade in its current state, and you
can get out even or at a profit, it might be worth exiting the
trade.  If you're at breakeven, your chances of profit are now 50-
50.  At the CPTI we strive to create scenarios that have a better
than even chance of profitability.  You might be better off in
another position with a better chance of success.

There sure are a lot of decisions to make, aren't there?  And
there are no set answers to those questions.  All we can do is to
try to keep the odds in our favor as much as possible.  Hopefully,
we're going to win more than we lose and keep our losses to a
minimum.  But it's still a gamble and you should be comfortable
with the strategy, know how (and when) to make adjustments, and
know how (and when) to exit the trades.   If you're not
comfortable with the risk, and the possibility of losing the money
that is at risk, you should not be trading.

I'm glad you've been paper-trading.  It's a great learning tool.
Keep up the good work, the learning, and the paper-trading.  Put
your toe in the water and feel what it's like to trade real money.
Even a small position will be a meaningful experience -- as you've

Hi Mike
Had success this month with both MMM and OEX again this month.  I
got a little nervous here at the end and bought back out of the
positions to protect my profits.  My IBM play was profitable with
the short straddle, but too nerve wracking.  I bought back out of
it ahead of earnings for a small profit, probably not worth the
effort.  Just want to send some appreciation for your column.  I
have learned a ton from you!

Glad you did well -- glad you're learning and profiting from the
knowledge. There's nothing wrong with locking in profits.  If
you're going to put on new positions, you might consider putting
them on tomorrow (Friday).  If you wait till Monday, premium will
erode for two more days.  Also, remember that June is a five-week
option cycle.

It's tough to find neutral trades now.  The market is either going
to bust through this resistance or tank.  Might be time to look at
straddles.  Take care and keep in touch.

May CPTI Portfolio Positions

Position #1 -- SMH Baby Condor.  Thursday's Close: $28.31
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.  Our safety range is $23.95 to $28.55.
It's still within the range – barely.  Tomorrow (Friday), at the
open, you may be able to buy back the short call at $.95 and
record a $100 profit – or you can roll the dice.  Do you like life
in the fast lane?

Position #2 – SPX Iron Condor.  Thursday's Close: 946.67
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, but Friday bounced up again.  We have a
16.59-point cushion.  Isn't this exciting?  If you want, the
spread can be closed now for about $2.35.  That would be an
acceptable dime loss.  Only a week to go.  Option trading is not
for the meek.

Position #3 – MSFT Minage-A-Qua – Thursday's Close: $25.79
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 right at
our break-even point.  When the market opens tomorrow, you can
probably buy back the short call for $.85 and lock in about $500
profit – or let it ride!  Do you feel lucky?

Position #4 – DJX Minage-A-Qua – Thursday's Close: $87.13
The DJX tracks the DOW.  The DOW is in an uptrend with resistance
at $86 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.

The DOW has made chopped liver of the $86 resistance.  Oh well, we
can't be right all the time.  We're taking a little hit on this
one.  When the DOW dipped into negative territory for about 20
minutes today, I decided that, we'd hang on if it continued down,
or we'd bail if it bounced back up.  Guess what!  We had to buy
back the short DJX $84 call for $2.85.  That means we took a $600
loss on this position.  If we hadn't, we'd have taken an $880 loss
as the European style DJX options expired today.

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

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