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Daily Newsletter, Tuesday, 05/20/2003

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The Option Investor Newsletter                 Tuesday 05-20-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Mad Dow Disease
Futures Markets: Consolidation
Index Trader Wrap: See Note
Market Sentiment: Resilient
Weekly Fund Screen: Currency Diversification


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      05-20-2003           High     Low     Volume Advance/Decline
DJIA     8491.36 -  2.00  8550.26  8416.72 1.84 bln   1786/1416
NASDAQ   1491.09 -  1.70  1505.18  1480.13 1.66 bln   1557/1682
S&P 100   463.58 -  0.47   466.31   459.55   Totals   3343/3098
S&P 500   919.73 -  1.04   925.34   912.05
W5000    8772.96 -  9.90  8827.64  8704.68
RUS 2000  409.03 +  0.71   411.36   406.19
DJ TRANS 2365.28 +  4.30  2379.11  2345.82
VIX        23.37 +  0.33    25.08    22.37
VXN        32.22 +  1.12    32.36    31.06
Total Volume 3,924M
Total UpVol  1,798M
Total DnVol  2,078M
52wk Highs  405
52wk Lows    35
TRIN       1.51
PUT/CALL   1.00
************************************************************

Mad Dow Disease

The Dow reacted to the news events today by trading in a 133
point range but ended up almost exactly where it started. The
Dow suffered from attack by mad cows, orange alerts, terrorist
bankers and rich investors. Without economic events to attract
attention the Dow is free to shift focus hourly as news events
take precedence.

Dow Chart - Daily



Nasdaq Chart - daily



Wilshire 5000 - Daily




Economically there was little to produce direction with only
the weekly Chain Store Sales report on the calendar today. Sales
fell -0.1% last week making three losses in the last four weeks.
The minor drop was not material and was quickly overshadowed
by earnings from Home Depot which beat the street by two cents.
It was not all positive because same store sales only rose by
+0.1% compared to prior estimates of +2%-4%. Nordstrom also
reported earnings that beat the street by 8 cents but it was
two cents less than last year on 10% less revenue.

The real problems causing the Dow to swoon included an interview
with George Soros who said he was now shorting the dollar. His
comments sent the dollar to fresh four year lows despite many
jokes about his late entry into the market. Soros said he
had to listen to the Secretary of the Treasury and take action
based on his comments. He was referring to Snow's comments over
the weekend. He also went on record as criticizing the U.S. use
of excessive powers in Iraq. He said his Open Society Institute
would setup a special unit called Iraqi Revenue Watch to monitor
the use of Iraqi oil funds. Should we add him to the known
terrorist list?

Another problem was the reporting of Mad Cow disease in Canada.
The real problem was not that it had been found but that so
much time had passed since the incident. The cow was tested and
killed in January but the news did not go public until today.
The concern was the potential for other cattle, which had not
been diagnosed to have already made it though the food chain.
Also, they have been unable to determine how the disease was
passed. Mad cow is not passed from cow to cow. In Europe the
disease was passed by using contaminated food made from bone
meal and other parts from other animals already slaughtered.
The U.S. meat sellers like Tyson (TSN) and Smithfield Foods
(SFD) and restaurants like MCD, WEN, OSI fell on the news.
McDonalds was quick to point out that no Canadian beef was
imported for use in U.S. stores. All U.S. stores use only local
beef. The Canadian beef is used in Canadian stores and only comes
from federally inspected sources. Outback Steakhouses said they
only use USDA top choice or prime Midwestern grain fed beef. They
still dropped -1.16. The problem is not in the danger but in
the perception of danger. Beef is already depressed from health
concerns and from diet trends that changed when the last round
of Mad Cow hit Europe. Beef consumption fell -25% during the
last scare. The U.S. has temporarily banned all beef imports
from Canada.

After denying that they were going to change the terrorist alert
level early this morning the Homeland Defense dept reneged and
raised it to orange late in the afternoon. There were multiple
sources of what are called specific and credible references that
Al Queda could be planning a Memorial Day attack in the U.S. and
elsewhere. The U.S. closed embassies in various countries where
the risk is highest. New arrests were made and according to news
reports suspects already in custody said the planned attacks were
already underway. We know from the last time the "perps" confessed
they later confessed to making it up. The administration is faced
with a losing situation. They have to assume they are true and
raise the alert level or be skewered on their own sword if they
ignored the intelligence and something actually happened. The
markets did not like the news and sold off strongly on the
reversed position and the assumption there was new evidence. Once
the news filtered through the floor the consensus was a case of
too much caution and the markets recovered to flat. After the
close it was learned that the New York National Guard was being
called up and California law enforcement was going on 12hr shifts.

In the "I am so rich I don't need $300 million" department Warren
Buffet attacked on the dividend tax cut as "Voodoo Economics"
reviving a term from a past Bush campaign. He said he would
rather see everyone get a $1000 tax rebate to put money in
the hands of the lowest tax payers. Evidently those who are
funding new business and buying equipment do not need any breaks.
Warren said a $1 billion dividend to Berkshire shareholders would
net him $310 million and he thought his secretary needed a $1000
rebate more than he needed the dividend. Say what? That is not an
exact quote but sums up the meaning. These comments just added
fuel to the fire that will continue to slow the process of getting
the tax cut passed. Of course spending is flying unhindered
through the same group of lawmakers. Warren, if you have so much
maybe you should consider donating your $310 million to a needy
bunch of option investors. I would gladly handle the distribution
for you since your secretary is already overworked and under
privileged. No, you cannot target individuals inside the U.S.
with cruise missiles just in case anybody in the White House was
leaning in that direction.

Dow components MRK and JNJ continued to drop on yesterday's drug
news until late afternoon. It appeared that a buy program hit
them around 3:48 and helped the Dow return to near zero at the
close. The $DRG.x index recovered slightly but still finished
negative for the day.

After the close HPQ announced earnings that beat the street by
two cents and affirmed estimates for the year. The stock traded
up +1.29 in after hours. HPQ said sales in servers and printers
rose slightly but personal computers fell during the quarter.
Carly Fiorina said the computer business remained a two horse
race between them and Dell. She said demand was muted with
laptops doing better than desktops. They said technology spending
still looked challenging for the near term and the SARS impact
was still unknown.

Traders should be encouraged that there was no follow through to
Monday's drop. The dip to 8500 finally came but the dip buyers
did not appear in volume. This could have been due to the lack
of economic news and the confusion over the dollar from Monday.
Bonds are still going up and traders were hesitant to jump back
into the market. Today they tried to buy the open but the flurry
of random news events kept blunting every attempt. The combination
of Mad Cow and Orange Alert finally broke support to push the Dow
to near 8400 but that was too much temptation to resist and the
bargain hunters started shopping. Unfortunately they were unable
to rally it back over 8500 which could now be resistance again.
The Nasdaq failed to hold 1500 and was less successful in
returning to that level with HPQ scheduled to announce earnings.

There are still signs of selling with a net outflow of funds
last week and several different surveys showing that insiders
are dumping stocks. Once survey said four times more insider
transactions were sells and another said up to ten times the
insider transaction volume was from sellers than buyers. The
indexes should open up tomorrow on the HPQ news with HPQ, a Dow
component, up +1.29 in after hours. However the futures are not
showing that tonight. The cautious comments about muted demand
and challenging conditions may be contagious.

Tomorrow we have no material economic reports but Greenspan will
be speaking before the joint Economic Committee right after the
market opens. The trading from today is not going to inspire
anyone to rush out and go on a buying spree. The mad cow news
may impact negatively in Europe/Asia after their recent and
costly scare where 41 people died from the disease. Those markets
could set the tone for our open and any Greenspan comments about
deflation could add to that tone. We know he will try to spin
any comments we can actually understand so I would be surprised
at any negative consequences. What could happen would be more
comments about the Fed being on guard and ready to act aggressively
to combat deflation. If that action is deemed to include support
of bond prices then we could see yet another round of bond buying.

The dip to near 8400, nearly -300 points below Friday's close
and the lower end of the 8200-9000 range I suggested in Sunday's
market wrap does not change my market view. I am still seeing
that as the trading range for the near future. I am surprised
the 8500 level was not bought strongly but I am not concerned
about it. After a huge rally from mid March we were due not for
a single day but for multiple days of profit taking. Dow 8500
may be the focal point for some time with movement both above
and below. There was significant buying support in the 8425
range (S&P 920) but it did not chase the price once it started
to bounce. It simply faded as we moved up. This tells me they
are content to wait for another dip and do not feel the need to
chase the train. The VIX rose to 25.08 intraday on the terrorist
news but quickly returned to its downward slide. With news the
governing force this week I would not be surprised to see an
increased level of volatility as profits are shaken out.

We need to find the level where bulls are comfortable holding for
the summer and I do not think we are there yet. The 38% Fib level
does not come into play until just over 8200. This gives us
plenty of room to trade without endangering the overall up trend.
I still believe that bonds will not continue to soar to higher
levels forever despite a new 45-year low for yields today. We will
eventually see a huge asset allocation shift once stocks appear
a better investment than a 3.37% treasury. This event may not
occur until the economic news for May begins to flow next week.
Positive economic news would be confirmation that the bond highs
had been reached and the shift could begin. Investors wanting to
beat the rush could begin moving assets at any time. The Greenspan
speech could be a pivotal point for the week if investors get that
warm and fuzzy feeling from the two dollar words. We will give you
a play by play in the monitor as it occurs.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Consolidation
Jonathan Levinson

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

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
DJIA      8619   8555   8486   8422   8353
COMPX     1517   1504   1492   1479   1467
ES03M      933    926    919    912    904
YM03M     8614   8550   8474   8410   8334
NQ03M     1138   1128   1116   1107   1095

The markets gapped up slightly on the open, and held those levels
within a tight range until the early afternoon when amid news of
the increased terror alert level and an outbreak of mad cow
disease, the indices plunged to their lows of the day.  The fall
was quickly reversed, and the indices closed back within their
initial range.  Volume was heavier than yesterday on the NYSE at
1.83B shares, and lighter on the COMPX at 1.66B shares.

The VIX added .33 to close at 23.37, the VXN 1.12 to 33.22 and
the QQV +.75 to 27.86.  The put to call ratio closed at .97.

Gold had another good day on the back of continued weakness in
the US Dollar Index, with GC3M adding 3.70 to 368.10 as of this
writing.

10 minute 5 day chart of DX3M




The CRB was stronger, closing back above 240, despite the extreme
weakness in live cattle futures, which closed limit down 1.50
cents at 72.4 cents per pound.

Although the action in equities looked bullish, with minor losses
on the YM and ES contracts and a green close on NQ, the charts
show me more of a consolidation of losses than the establishment
of any kind of meaningful bottom.  Before diving into the charts,
the following is the QQQ:$QQV ratio chart that I used last week
to hunt for a trend reversal:

QQQ:QQV chart




We see that yesterday printed a bearish engulfing, and today the
QQQ weakened again relative to its volatility or "fear" index,
the QQV.  Today's print confirmed yesterday's move, which has
bears satisfied with today's action.

Daily QQQ chart




Although the wide range and close near its opening levels
resulted in a doji star, with the narrow candle body placed
between long upper and lower shadows, it will take a strong up
day tomorrow to turn it into a doji reversal bottom.  The doji
print is difficult to see on the above chart, but we see that it
closed below the secondary ascending trendline discussed in last
night's futures wrap.  The oscillator sell signals were not
reversed by today's action.

30 min QQQ chart




On the 30 minute candles, we see the gap up to horizontal
resistance in the 27.85 area, and the failure to regain that
level on the runup at the close.  We could well gap above that
resistance by tomorrow's open, particularly given the bottomy
MacD.


On to the futures:

Daily chart of the NQ3M




We see the same action on the NQ3M daily candles as on the QQQ
chart.  The oscillators are showing sell signals that we
confirmed with today's action, and a breach of horizontal
support.  The most bearish scenario would be a failure to
penetrate that s/r line tomorrow.

30 minute 20 day chart of the NQ3M




Notice how the stochastic, which commenced an up-phase at the
close yesterday and continued it today, was truncated by the
afternoon news-based selloff.  We see the slight up-tick in the
stochastic from the closing rise.  Whether this resumes into a
full run back up to overbought territory, or if it flops around
during more rangebound trading will have be seen during
tomorrow's session.  However, the stochastic moved up throughout
the morning on what was essentially a sideways move in equities-
this is not bullish action, as bulls would want to see good price
traction out of the stochastic up-phase.

Daily chart of the ES3M




On the ES, the doji candle body closed right on the horizontal
trendline.  In other respects, the action was the same as for the
NQ contract, with today's print violating the 21 day moving
average and confirming yesterday's bearish break out of the
ascending wedge formation.

30 minute 20 day chart of the ES3M




Again, similar action to that of the NQ 30 minute chart.
Horizontal resistance is in the 920 area, and the oscillators are
ambiguous, with the slower MacD trying to get in gear to the
upside while the stochastic worked off all of yesterday's
oversold extreme, even with ES closing in the red.

Daily chart of the YM




I've omitted the horizontal resistance line here to permit you to
see today's doji candle on the YM.  There's nothing to add,
except that the indecision of today's session is perfectly
represented by the doji print.  The market was not satisfied
either above or below the 8485 level, and tomorrow's session will
have to break the deadlock in one direction or the other.

30 minute 20 day chart of the YM3M




8500 is good round number resistance on the YM contract.  Note
that the ADX showed a weakening trend on the rise in price.  As
discussed last night, this establishes the upmove as corrective
within a downtrend established by yesterday's price decline.
Again, the picture-perfect setup would be the failure of that
horizontal s/r line.  Of course, the market's job is make it as
difficult as possible, and so tomorrow will have to tell.

Perhaps the best summary of today's action comes from the pivot
matrix.  I generate the pivots independently of my own reading of
the charts.  The daily pivot updates narrowed the range, with the
resistance levels coming down but the support levels moving up
slightly.  This reflects the smaller overall range, but also
depicts the indecision among bulls and bears alike during today's
session.

See you at the bell!


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_052003_1.asp


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

Resilient
by James Brown

The dictionary defines the word "resilient" with the following:

1. Marked by the ability to recover readily, as from misfortune.
2. Capable of returning to an original shape or position, as
   after having been compressed.

They should add:

3. The U.S. Markets as witnessed in recent sessions.

Yes, the markets have been resilient to say the least.  Today
witnessed a barrage of negative news from rumors of terrorist
threats to mad cow disease rediscovered in Canada, to
confirmation of terrorist threats and a raising of the homeland
security level to orange to more negative comments about the Bush
tax-cut bill and the falling dollar.  Despite it all the
Industrials managed a 2-point loss and the NASDAQ Composite
closed with a 1.68-point loss.  Not a bad day considering what
traders endured.

As much as we feel the markets need to pull back to allow a more
orderly digest of gains from the March lows today's session marks
another small victory for the bulls.  We are seeing a strong
number of bullish crossovers and closing prices under what should
be minor support levels.  While we think traders might push the
markets higher tomorrow morning we doubt it will last and bears
will probably use any strength to open new short positions.

Lord help us if there is another terrorist attack on domestic
soil.  The economy is growing as slow as possible and any
successful attack would be lethal to its recovery.  This concern
could be a dark cloud over trading for the rest of the week as we
approach the Memorial Day holiday.


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

Market Averages

DJIA ($INDU)

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

Moving Averages:
(Simple)

 10-dma: 8609
 50-dma: 8329
200-dma: 8326



S&P 500 ($SPX)

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

Moving Averages:
(Simple)

 10-dma:  934
 50-dma:  891
200-dma:  883



Nasdaq-100 ($NDX)

52-week High: 1351
52-week Low :  795
Current     : 1113

Moving Averages:
(Simple)

 10-dma: 1141
 50-dma: 1079
200-dma: 1006



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


Both the VIX and the VXN are still in dangerous territory and not
a signal to open bullish positions.

CBOE Market Volatility Index (VIX) = 23.37 +0.33
Nasdaq-100 Volatility Index  (VXN) = 32.22 +1.12

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

          Put/Call Ratio  Call Volume   Put Volume

Total          1.00        562,830       564,411
Equity Only    0.86        458,094       395,100
OEX            1.58         14,078        22,313
QQQ            4.59         25,140       115,301


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

Bullish Percent Data

           Current   Change   Status
NYSE          59.7    + 0     Bull Confirmed
NASDAQ-100    79.0    + 1     Bull Confirmed
Dow Indust.   70.0    + 0     Bull Confirmed
S&P 500       67.8    - 1     Bull Confirmed
S&P 100       66.0    - 1     Bull Confirmed


Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart.  Readings above 70 are considered overbought, and readings
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

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

 5-Day Arms Index  1.47
10-Day Arms Index  1.32
21-Day Arms Index  1.15
55-Day Arms Index  1.30


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

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

Market Internals

            -NYSE-   -NASDAQ-
Advancers    1554      1447
Decliners    1269      1586

New Highs     165        89
New Lows       22        11

Up Volume    830M     641M
Down Vol.    976M     989M

Total Vol.  1825M     1652M

M = millions


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


Commitments Of Traders Report: 05/13/03

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

Just as the major averages barely moved on the week, we're
seeing the same hesitation in the futures positions.  No
one is shifting any money around as they wait for the next
move.

Commercials   Long      Short      Net     % Of OI
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%
05/16/03      429,028   419,553     9,475     1.1%

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
04/22/03      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%
05/16/03      151,883   148,479     3,404      1.1%

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

Again, this is a repeat of what we're seeing with the
S&P 500 futures.  There is little change in the overall
net long or net short positions for either the commercials
or the small trader.

Commercials   Long      Short      Net     % Of OI
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%)
05/16/03      178,679   452,727   (274,048)  (43.4%)

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
04/22/03      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%
05/16/03      421,540    57,483   364,057    75.9%

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


NASDAQ-100

Hmmmm.. now we're seeing some movement here.  Commercials
have lightened up on their bullish positions while small
traders have lightened up on their shorts.  Is this
forecasting a potential trend change in the NDX?


Commercials   Long      Short      Net     % of OI
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%
05/16/03       43,539     39,046     4,493    5.4%

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
04/22/03       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%)
05/16/03       11,706    16,104   ( 4,398)  (33.0%)

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

DOW JONES INDUSTRIAL

We're not seeing a lot of change here either.  Yes, the
commercials added to both long and short positions and
the small trader beefed up their shorts but there is
nothing to suggest a change in sentiment.

Commercials   Long      Short      Net     % of OI
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%
05/16/03       18,265    14,396    3,869      11.8%

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
04/22/03        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%)
05/16/03        7,873     9,058    (1,185)   ( 6.9%)

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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******************
WEEKLY FUND SCREEN
******************

Currency Diversification

Morningstar.com says these four international funds may be good
to own when the dollar falls since they make a practice of "not"
hedging their currency risk.  Because foreign funds must convert
back into dollars for reporting purposes, returns are subject to
currency movements.  However, how foreign funds manage "currency
risk" varies from fund to fund, providing U.S. investors various
levels of currency diversification.

Currency risk is generally managed in one of three ways.  First,
some funds make a practice of hedging substantially all of their
currency risk, tying their investments to the U.S. dollar.  Some
funds selectively hedge the portfolio depending on their outlook
for the dollar, doing no hedging when the dollar falls and doing
some hedging, up to 100%, when the dollar rises.  However, wrong
currency bets can impair performance, wiping out fund profits in
local currency terms, or increasing losses.

The third way to manage currency risk is to perform "no" hedging
by practice.  Foreign funds that don't hedge currency risk offer
investors currency diversification.  In 2003, the Euro has risen
versus the dollar, enhancing the returns of European and foreign
stock funds (relative to comparable U.S. stock funds).  The four
funds that Morningstar says are good to own when the U.S. dollar
falls make a practice of doing no hedging.  They also have, over
time, produced above-average, risk-adjusted returns versus their
category peers, per Morningstar.

Out of these four funds, we'll tell you which one we might favor
if we had to pick one to add to a portfolio of U.S. equity funds.

Screening/Evaluation Process

Below is a list of the four foreign stock funds that Morningstar
cites in its May 15th article.

 Foreign Funds (That Don't Hedge Their Currency Risk):
 Fidelity Diversified International Fund (FDIVX)
 Harbor International Fund (HAINX)
 Vanguard European Stock Index Fund (VEURX)
 T. Rowe Price International Bond Fund (RPIBX)

This short list consists of two diversified international stock
funds, one regional stock fund, and one international bond fund.

Vanguard European Stock Index Fund seeks to match the return of
the MSCI Europe Index, which consists of over 550 stocks across
15 countries.  It remains fully invested at all times and has a
practice of not hedging its currency risk.  A low expense ratio
of 0.30% gives it a significant cost advantage to similar funds
investing in the region.

Fidelity Diversified International Fund invests across different
regions, countries and sectors in an effort to reduce the risks
of foreign stock investing.  It seeks to be an all-weather fund,
investing in over 300 company stocks in Europe and Pacific/Asia.
Fund manager, Bill Bowers, focuses his efforts on finding growth
stocks at reasonable prices, not on predicting currencies.  This
fund's "value-added" comes from good stock picking, supported by
Fidelity's top-notch fundamental analysis.

Harbor International Fund is less diversified in terms of region,
with more than 77% of assets invested in the U.K./Western Europe.
Long-time sub-investment advisor, Hakan Castegren (Northern Cross
Investments) buys stocks of companies with appreciation potential
that are underpriced by the market at time of purchase, and then
holds on to them.  He rarely hedges the fund's currency exposure,
cites Morningstar.  Rather, he seeks to add value through active
security selection, like Fidelity Diversified International Fund.

The share class that Morningstar discusses in its article (HAINX)
is for institutional investors and has a $100,000 minimum initial
investment requirement.  The investor share class (HIINX) of the
fund requires a minimum initial investment of $2,500, but sports
a higher expense ratio (1.68% vs. 0.87% for institutional class).

T. Rowe Price International Bond Fund seeks total return through
investment primarily in "non-dollar" denominated debt securities.
Its manager, Chris Rothery (since 1-1-94) shifts the portfolio's
maturity structure based on interest rate trends for each nation.
When interest rates are expected to fall, Rothery may go long to
seek capital appreciation and higher current yields.  When rates
are expected to rise, Rothery may invest in debt with short-term
maturities to preserve capital.  The fund is non-diversified, so
it may hold a greater percentage of assets in Rothery's favorite
securities.

Fidelity Diversified International Fund and Harbor International
Fund (I Class) currently receive high ratings (5 stars) per fund
tracker Morningstar for risk-adjusted performance in relation to
their foreign stock category peers.  However, investor shares of
the Harbor International Fund are relatively new and are not yet
rated by Morningstar.  We will use the institutional share class
for comparison purposes since it has the longer track record but
bear in mind that investor share class performance will be lower,
due to its higher relative expense ratio.

Of the four funds, T. Rowe Price International Bond Fund has the
highest YTD total return through May 18, 2003 of 10.6%, doubling
the YTD return of the U.S. equity market, as measured by the S&P
500 index.  This unhedged bond fund also sports a 12-month yield
of 2.56%, per Morningstar.  Returns have been more volatile than
other foreign bond funds, but over the past 12 months, T. Rowe's
performance has been superb, returning 30% for fund shareholders.

Holdings consist primarily of non-USD denominated debt securities
issued by (high-grade quality) European governments.  Unlike many
of its category peers, this fund doesn't hedge its currency risk.

Vanguard European Stock Index Fund, up 6.2%, has produced the top
YTD return as of May 18 among the three international stock funds
cited by Morningstar.  Since the Euro has outperformed the dollar
in 2003, the Europe stock index has outpaced its U.S. counterpart
this year, the S&P 500 index, by roughly a full percentage point.
Fidelity Diversified International Fund has produced a YTD return
of 5.2%, on par with the U.S. stock index, while Harbor's fund is
lagging in 2003, up just 2.2%-2.3% depending on which share class
you use.

In the next section, we tell you which fund we like in this group
and why.

Our Favorite Fund

If we had to pick a foreign fund out of these four funds, we'd be
inclined to go with the Vanguard European Stock Index Fund, which
seeks to match the return of the MSCI Europe Index.  The "Europe"
index measures the performance of 12 developed European countries
including -- Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland, and the United Kingdom.





You can see how well the fund has performed recently, increasing
13.2% over the past 3 months and getting a substantial lift from
the Euro's outperformance versus dollar.  Gus Sauter, Vanguard's
Quantitative Equity Group managing director and index guru, runs
the portfolio and does a good job of providing European exposure
at a low cost.  At 0.30%, the fund's expense ratio is a fraction
of the 1.95% Europe stock fund category average, per Morningstar.

This fund's low operating expenses help it to remain competitive.
Its trailing 10-year average annual return of 7.6% through April
30, 2003 was good enough to rank in the top 35% of fund category.
Like the Vanguard 500 Index Fund, it won't always rank among the
highest performers in its category peer group, but over the long-
term it has ranked among the group's top one-third (due in large
part to its significant cost advantage).

Investors seeking to further diversify a portfolio of U.S. stock
funds and securities have an excellent, low-cost European region
fund here.

Conclusion

A major benefit of investing in one of these international funds
is currency diversification.  Funds that hedge some/all of their
currency risk link their investments to the U.S. dollar, and are
generally less volatile.  Funds that don't hedge their currency
risk provide currency diversification, but may be more volatile
compared with funds that make a practice of fully or selectively
hedging their currency risk.

If you want to capitalize on the Euro's recent rise against the
dollar, one way to diversify U.S. holdings may be to simply put
some money into the low-cost Vanguard European Stock Index Fund.
For more information, go to Morningstar.com and to the Vanguard
Funds Group website (www.vanguard.com).

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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The Option Investor Newsletter                  Tuesday 05-20-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: None
Daily Results
Call Play Updates: AMGN
New Calls Plays: OHP
Put Play Updates: AIG, GS, JCI, MTG, RYL
New Put Plays: LLL


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

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


CALLS:
*****

None


PUTS:
*****

None


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

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

CALLS    LAST      Mon    Tue

AMGN     61.03   -2.04   0.76  Not Giving Up
MEDI     34.26   -0.48   0.42  Long-term, no update
OHP      36.51   -0.66   1.32  New, Relative strength

PUTS

AIG      55.42   -2.09  -0.44  Triggered, watch $55
GM       33.33   -0.80  -0.28  Long-term, no update
GS       74.45   -2.35   0.10  Finally broke $74
JCI      80.52   -0.96  -0.13  New Stop, near support
LLL      41.94   -0.69  -1.29  New, room to fall
MTG      44.80   -1.01  -0.12  Watch the $44 level
RYL      55.11   -1.00   0.21  Triggered, be cautious.


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

Amgen, Inc. - AMGN - close: 61.03 change: +0.76 stop: 59.25

After its precipitous plunge on Monday, it was encouraging to see
AMGN once again exert its relative strength and move higher
today.  Yesterday's slide seemed to be induced by the Maine
prescription drug case, which had shares of all the major
pharmaceutical companies plunging on fears of sharply lower
profits due to declining margins on sales to the uninsured.
After finding late-day support at the $60 level yesterday, AMGN
bounced mildly from that support this morning, consolidated
throughout the day and ended with a respectable gain on the day,
ending very near its intraday high.  For traders willing to step
into the breach, it looks like yesterday's selloff represented a
solid entry into the play.  The problem is that AMGN has now
shown an inability to push through the new descending trendline
connecting its recent highs, currently $63.20.  So if the stock
is going to really move higher, it is going to take a decisive
(read:volume) break above that line.  But first will come the 20-
dma ($61.97), which is now resting overhead as resistance.  In
the meantime though, successive rebounds from the $60-61 area
still look like good entries into the play.  We're maintaining
our stop at $59.25 until that upper trendline is broken.

Picked on May 11th at    $61.24
Change since picked:      -0.21
Earnings Date          07/22/03 (unconfirmed)
Average Daily Volume = 10.6 mln
Chart link:



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

Oxford Health - OHP - close: 36.51 change: +1.32 stop: 34.00

Company Description:
Founded in 1984, Oxford Health Plans provides health plans to
employers in New York, New Jersey and Connecticut, through its
direct sales force and through independent insurance agents and
brokers. Oxford's services include traditional health maintenance
organizations, point- of-service plans, third-party
administration of employer-funded benefit plans and
Medicare+Choice plans. (source: company press release)

Why We Like It:
Relative strength and decent fundamentals are what draws us to
OHP and its competitors like UNH and WLP.  We'd prefer to play
the higher dollar stocks since we can get a bigger move in the
option price but UNH seems to be stumbling just a bit (still
doing better than the rest of the market this week) and WLP is
too hot to chase it.  We almost added WLP on Friday but placed it
on the OI watch list instead.  We liked OHP's Friday session
breakout over big resistance at $35.00 and the simple 200-dma.
Dip buyers liked it even better when the stock pulled back to
$35.00 on Monday and held there despite the 185-point loss on the
Industrials.  Given the entry point, bulls pushed shares of OHP
back to fresh three-month highs today.  The healthcare insurance
group was one of the biggest winners last year and all
indications suggest it will be a big winner for 2003 as well.  In
their last conference call OHP's management raised their full
year earnings guidance from $4.00-4.10 to $4.17-4.27.  They claim
that recent trends have been positive with higher premiums and
lower than expected medical costs.

We're going to open this as a call play at current levels with an
initial stop loss at $34.00.  The PnF chart is showing overhead
resistance at $40.00 and we'll make that our short-term target.


Suggested Options:
We're going to suggest June and August options.  July options
exist but the open interest is virtually nil.  This is one time
we are going to list the 37.50 strikes instead of passing over
them for round-number alternatives.

BUY CALL JUN 35.00 OHP-FG OI=2364 at $2.45 SL=1.20
BUY CALL JUN 37.50 OHP-FU OI= 207 at $1.05 SL=0.00
BUY CALL AUG 35.00 OHP-HG OI=3361 at $3.40 SL=1.65
BUY CALL AUG 37.50 OHP-HU OI= 683 at $2.05 SL=1.00

Annotated Chart of OHP:



Picked on May 20th at $36.51
Change since picked:   +0.00
Earnings Date       05/05/03 (confirmed)
Average Daily Volume = 857 thousand


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

American Intl Group - AIG - cls: 55.42 chg: -0.44 stop: $58.00

The put play on AIG has been TRIGGERED.  Despite the stock's
strength late last week shares never managed to trade above
$58.00.  They did trade to $58.00 but never over it.  Not that it
mattered since we had not yet been triggered into the play but it
does reinforce the overheard resistance levels already observed.
The failed rally at the $58 mark and the stock's simple 200-dma
looks like a tempting entry for bearish positions.  The stock
dipped to $54.50 this afternoon before shares bounced back into
the close.  This triggered us at $54.94 and our suggested stop is
$58.00.  We're a little disappointed that AIG managed to bounce
back above $55 instead of closing below it but the weakness in
the IUX insurance index is demonstrating a similar pattern.
Traders can continue to target a move under $55.00 as an entry or
failed rallies near $58.00.  There appears to be no new
significant news to speak of.

Picked on May 20th at $54.94
Change since picked:   +0.48
Earnings Date       04/24/03 (confirmed)
Average Daily Volume = 7.2 Million
Chart link:


---

Goldman Sachs - GS - close: 74.45 change: +0.10 stop: 77.00*new*

To call the $74 support level a stubborn barrier to the bears
would be a gross understatement.  That level finally cracked this
afternoon with the broad market apparently losing support.  In
concert, the XBD index lost the $450 support level we had been
looking at as confirmation of sector weakness.  Then in the final
hour, short-covering appeared, driving the XBD back through the
broken support and GS followed suit, closing once again
fractionally above $74.  Interestingly, the stock found support
this afternoon just above the 50-dma ($72.87) with an intraday
low of $73.22.  Despite that irritation, it was encouraging to
see the intraday break of those support levels, especially after
GS was turned back from its descending trendline connecting the
recent highs below $77 yesterday.  The best entries now look like
a failed rally below the 20-dma ($75.97), which is just starting
to roll lower, or another break under the $74 level.  We're
tightening our stop just slightly to $77 (still above the
trendline) where it will likely remain until GS closes under $74

Picked on May 8th at    $74.06
Change since picked:     +0.39
Earnings Date         06/19/03 (unconfirmed)
Average Daily Volume = 4.31 mln
Chart link:


---

Johnson Controls - JCI - close: 80.52 change: -0.13 stop: 84.00

After initiating coverage of JCI over the weekend, everything had
been going our way until the final hour of trading on Tuesday.
After a drop at the open on Monday, the stock drifted lower to
close on its low of the day and continued its slow, but steady
drift lower today.  With only an hour left in today's session,
JCI cracked below the $80 level and it looked like a sure bet to
close under the 200-dma.  "Not so fast", said the bulls and a
short-covering ramp ensued, popping the stock back over the $80
level and the 200-dma by the close.  While it was a bit
irritating to not get the close at the lows that looked likely
prior to the final hour, we can't be too disappointed with the
pattern of lower intraday lows and lower intraday highs so far
this week.  Another rollover in the $81.00-81.50 area can be used
for new entries, with Monday's intraday resistance just below the
$82 level likely to provide firm support.  Conservative traders
may want to tighten their stop to just above $82.  We're still
eyeing an eventual drop to the 50-dma and then to support at $77,
so we're going to give the play a bit more room to move, lowering
our stop to $84, just above Friday's opening high.

Picked on May 18th at   $81.61
Change since picked:     -1.09
Earnings Date         07/15/03 (unconfirmed)
Average Daily Volume = 633 K
Chart link:


---

MGIC Invest. Corp. - MTG - cls: 44.80 chng: -0.12 stop: 47.00*new*

While not exactly the picture of weakness we'd like to see, our
MTG play is at least going in the right direction, riding its
200-dma (currently $44.87) lower.  We like that the stock has
closed just fractionally below that moving average on each of the
past two days and today closed below the ascending trendline from
the March lows.  That looks like a breakdown in the making,
although the real test will come at the $44 level which is solid
historical support.  When that breaks, the sellers ought to be
piling on, looking for a move down to the 50-dma and then on to
strong support at $40.  Intraday resistance is building near the
$45 level and the latest failed rally topped at $46, well below
the prior peak near $48.  It certainly looks like a building
pattern of lower highs and lower lows, doesn't it?  Failed
rebounds below the $46 level can be used for aggressive entries,
while those looking for a momentum entry will want to key off of
the $44 level.  We're lowering our stop to $47 tonight, as any
close above that level would clearly invalidate the bearish chart
pattern we're looking at right now.

Picked on May 15th at    $45.21
Change since picked:      -0.41
Earnings Date         07/15/03 (unconfirmed)
Average Daily Volume = 1.06 mln
Chart link:


---

Ryland Group Inc - RYL - close: 55.12 change: +0.22 stop: 59.01

The relative strength here is amazing.  Despite the weakness in
the markets this week (okay, just on Monday) shares of RYL have
managed to hang onto the $55 level.  The dip below $55.00 on
Monday TRIGGERED our bearish play at $54.85.  This activated our
suggested stop at $59.01.  Investors seem reluctant to let go of
their winners and the entire sector has been strong but the
DJUSHB is at a critical level and another weak day in the market
could crack that support.  A drop below 375 for the index might
be the signal hesitant bulls need before they decide to take some
profits off the table.  This might correlate well with a move
under $54.50 or $54.00 for RYL.  We did note that RYL has been
just a tad weaker than many of its homebuilding-construction
counterparts.  Should we see a bounce in RYL then aggressive
traders could target a short entry on a failed rally near $58.00.

Picked on May 19th at $54.85
Change since picked:   +0.27
Earnings Date       04/23/03 (confirmed)
Average Daily Volume =   633 thousand
Chart link:



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

L-3 Communications -LLL - close: 41.94 change: -1.29 stop: 45.00

Company Description:
As a leading supplier of sophisticated secure communication
systems and specialized communication products, LLL provides
critical elements of virtually all major communication, command
and control, intelligence gathering and space systems.  The
company's high data rate communication, avionics, telemetry and
instrumentation systems and components are used to connect a
variety of airborne, space, ground-based and sea-based
communication systems.

Why we like it:
After flat-lining near the $500 resistance level for more than 2
weeks, the Defense index (DFI.X) finally succumbed to bearish
pressures on Monday, plunging through its 20-dma.  That weakness
persisted today, with the index shedding another 3 points, but
managing to hold above the critical $480 level.  LLL hasn't fared
so well in the past week though.  The stock topped out just below
$46 earlier this month before gradually drifting back down to the
200-dma (currently $44.81) and then solidly breaking below that
level last Friday.  The party really got started with the broad
market weakness on Monday, but even after breaking the $43.50
support level, LLL seemed like it might hold onto the $43 level.
Those illusions were dashed today, with the stock losing nearly
3% on a sharp increase in selling volume.  There's really no
story to go along with the compelling chart picture.  Just a weak
stock in a sector that appears to be losing strength by the day.

So is LLL just going to fall from its lofty heights, or is there
the potential for a bounce.  Based on the late day rally this
afternoon that barely affected the stock, it is entirely possible
that LLL plunges lower from here.  If that is the case, then
momentum traders will get a nice entry on a break below $41.75,
although they'll need to be mindful of the possibility of an
oversold rebound from the 50-dma (currently $41.27).  Clearly the
better entry would come on a failed rebound from Tuesday's close,
and that $43.00-43.50 resistance (broken support) level looks
like a good bet.  There is likely to be very strong resistance up
at the $44.00-44.50 area from Monday's gap, which will be
reinforced by the 200-dma.  Pretty much any failed rebound below
the top of that gap looks like a solid entry into the play.  Our
initial target on the downside will be the $40 level.  But if
things start to go badly for the sector, and drop back to major
support in the $37 area would be a very nice move and our
eventual profit target.  Initial stops will be rather wide at $45
so that we can give LLL room to move and prove its intentions.

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 $40 level (or below)
will want to utilize the July 40 Put, which provides greater
insulation from the spectre of time decay.

BUY PUT JUN-45 LLL-RI OI=384 at $3.70 SL=2.00
BUY PUT JUN-40 LLL-RH OI=762 at $0.90 SL=0.40
BUY PUT JUL-40 LLL-SH OI=572 at $1.50 SL=0.75

Annotated Chart of LLL:



Picked on May 20th at   $41.94
Change since picked:     +0.00
Earnings Date         07/22/03 (unconfirmed)
Average Daily Volume = 1.42 mln


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The Option Investor Newsletter                  Tuesday 05-20-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: CALL - OHP


**********************
PLAY OF THE DAY - CALL
**********************

Oxford Health - OHP - close: 36.51 change: +1.32 stop: 34.00

Company Description:
Founded in 1984, Oxford Health Plans provides health plans to
employers in New York, New Jersey and Connecticut, through its
direct sales force and through independent insurance agents and
brokers. Oxford's services include traditional health maintenance
organizations, point- of-service plans, third-party
administration of employer-funded benefit plans and
Medicare+Choice plans. (source: company press release)

Why We Like It:
Relative strength and decent fundamentals are what draws us to
OHP and its competitors like UNH and WLP.  We'd prefer to play
the higher dollar stocks since we can get a bigger move in the
option price but UNH seems to be stumbling just a bit (still
doing better than the rest of the market this week) and WLP is
too hot to chase it.  We almost added WLP on Friday but placed it
on the OI watch list instead.  We liked OHP's Friday session
breakout over big resistance at $35.00 and the simple 200-dma.
Dip buyers liked it even better when the stock pulled back to
$35.00 on Monday and held there despite the 185-point loss on the
Industrials.  Given the entry point, bulls pushed shares of OHP
back to fresh three-month highs today.  The healthcare insurance
group was one of the biggest winners last year and all
indications suggest it will be a big winner for 2003 as well.  In
their last conference call OHP's management raised their full
year earnings guidance from $4.00-4.10 to $4.17-4.27.  They claim
that recent trends have been positive with higher premiums and
lower than expected medical costs.

We're going to open this as a call play at current levels with an
initial stop loss at $34.00.  The PnF chart is showing overhead
resistance at $40.00 and we'll make that our short-term target.


Suggested Options:
We're going to suggest June and August options.  July options
exist but the open interest is virtually nil.  This is one time
we are going to list the 37.50 strikes instead of passing over
them for round-number alternatives.

BUY CALL JUN 35.00 OHP-FG OI=2364 at $2.45 SL=1.20
BUY CALL JUN 37.50 OHP-FU OI= 207 at $1.05 SL=0.00
BUY CALL AUG 35.00 OHP-HG OI=3361 at $3.40 SL=1.65
BUY CALL AUG 37.50 OHP-HU OI= 683 at $2.05 SL=1.00

Annotated Chart of OHP:



Picked on May 20th at $36.51
Change since picked:   +0.00
Earnings Date       05/05/03 (confirmed)
Average Daily Volume = 857 thousand


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