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Daily Newsletter, Tuesday, 06/03/2003

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The Option Investor Newsletter                 Tuesday 06-03-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Internals Rule
Futures Markets: Support holds
Index Trader Wrap: Bar-B-QQQ bear ribs
Market Sentiment: Teflon Market
Weekly Fund Screen: Hot "Growth" Funds


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      06-03-2003           High     Low     Volume Advance/Decline
DJIA     8922.95 + 25.10  8940.38  8861.32 1.80 bln   1758/1465
NASDAQ   1603.56 + 12.80  1603.74  1584.70 2.04 bln   1680/1583
S&P 100   488.11 +  2.75   488.93   484.27   Totals   3438/3048
S&P 500   971.56 +  4.56   973.02   964.47 
W5000    9290.05 + 35.10  9300.74  9226.40
RUS 2000  443.87 +  1.24   443.92   440.63 
DJ TRANS 2512.03 -  0.30  2512.42  2490.35   
VIX        22.45 +  0.22    23.42    22.34   
VXN        33.51 -  0.12    34.79    32.96 
Total Volume 4,109M
Total UpVol  2,365M
Total DnVol  1,682M
52wk Highs  757
52wk Lows    19
TRIN       1.48
PUT/CALL   0.93
************************************************************

Internals Rule

Despite a follow through dip at the open and another attempt
to sell off in the afternoon the internals continued to rule. 
With IBM getting whacked for -$4 intraday the Dow still managed
to return to positive territory and climbing at the close. 
New highs beat new lows 40:1. Nothing bearish about that. 

Dow Chart - Daily

 
Nasdaq Chart - Daily

 


Economically it was a slow day but overall the results were
positive. The Chain Store Sales snapshot for the week was flat
despite a wet Memorial Day weekend but they are still running
at +3% year-over-year. Declining gasoline prices are giving
consumers a little more extra cash in their pocket and some of
that cash is finding its way into the stores. Still stores are
complaining of higher than normal inventory levels due to no
buying surge at the end of the war. This would suggest the
summer period will see some heavy sales to reduce these levels. 
Sales means lower prices which means more buying is necessary
to maintain the same levels. It is a vicious spiral until demand
returns on its own. 

The Challenger Layoff report showed that layoffs dropped to 30
month lows at only 68,623 job cuts compared to -146,400 cuts
in April. This is in stark contrast to the U.S. Layoff report
we saw last week which showed a significant increase in layoffs
announced. While this is a positive change in the trend it
still means the Jobs Report on Friday could be negative. The
-68,623 number may be better than April but it is still negative. 
The bad news bulls celebrated this bit of good news with a nice
late morning bounce. 

The automakers dominated the news this afternoon with different
views and results for the last month. Overall the May auto sales 
came in slightly better than expected at 16.1 million units on 
an annual basis. Sales of Japanese manufacturers increased as 
they entered the incentive race. Although the overall number was
slightly above the consensus the individual makers were not all
positive. DCX said they would lose one billion Euros in the 2Q 
due to higher incentives and tough competition. GM posted a 
gain of +4% but Ford dropped -0.7%. DCX lost -3%. GM cut its
production plans for the second quarter by -20,000 units and
predicted the 3Q production would be down by -6%. GM said it
would continue the zero-percent financing through July-7th and
will offer cash rebates as high as $4000. UBS Warburg is
already on record as saying one of the big three companies is
likely to file bankruptcy if the trend continues. The news
outlets continued to spin the better than lowered expectations
results as positive. Sales were bad but not as bad as they 
expected! I know I am splitting hairs here but sometimes I think
they could spin an earthquake as a positive event. Shucks, they
do produce urban renewal. Ford also said they would cut 3Q
production by -14% or -141,000 vehicles. 

FedEx also said things were not as rosy as expected. They 
announced plans to cut 14,000 salaried employees and take a
charge of up to $160 million due to declining overnight package
shipments. They have already reduced capital expenditures, cut
aircraft orders and limited hiring. They warned that earnings
could miss First Call estimates by -19 cents for fiscal 2004. 
Workers are going to be offered a lump sum $10,000 termination
incentive and full pension benefits if they are over 50 years
old. 

In addition to FDX the market took a serious hit from IBM on
the day after they announced an SEC probe into their accounting
practices. The stock dropped over -$4 intraday before rebounding 
slightly to close near $84. (-$3.51) Seems there is a problem 
in revenue recognition. You know, the place where most accounting
games are played. Not enough details are known to form an opinion
but IBM has been criticized for years for the funny money games
they played internally. If you remember the earnings estimates
for last quarter were off because analysts had grown accustomed
to aggressive stock buybacks for IBM to make their numbers. With
the acquisition of Rational Software they delayed purchasing 
additional shares due to the dent in the cash flow. For the last 
three years IBM would reduce the number of shares outstanding 
each quarter by just enough to let them meet the earnings per 
share estimates. If you know you are going to be short a penny 
then buy back a couple million shares and you are home free. 
Recently I thought IBM was going to get away from the accounting 
games when they purchased PWC. Price Waterhouse was a cash 
generating money machine and would only get better when absorbed 
by IBM. It looks like the past has come back to haunt them. 

Revenue recognition determines when you get to account for 
profits. If you sell a computer today for cash you account for 
it in this quarter. If you sell it on time payments over five 
years then you may accrue 1/60th of the profit each month. If 
you lease it then all of your profit may be in the month it came
off lease. If you assumed a 10% residual (customer paid out 90% 
of the cost during the lease term) and the computer is worth 25% 
at the end then you claim a 15% profit in the month it is sold. 
That profit expectation is sometimes booked as deferred revenue 
at the start of the lease. Companies like IBM build up billions
in different types of deferred revenue due to the thousands of
different ways they sell their products. In the case of a 
consulting agreement do you claim the revenue up front for a 
24 month agreement, prorate it on a monthly basis, recognize 
it when billed or when paid? What if the bill remains unpaid 
for 90 days, 180 days? To please the earnings sharks you want 
to recognize it as quickly as possible. 

This is part of the claim in the current investigation. It
appears IBM was claiming revenue on sales that were unpaid for
more than 120 days which is normally amounts to a collection
account. It is so tempting when you are as big as IBM to quietly
take a few million out or put a few million into the deferred
income bucket to appease the earnings crowd. The problem? A
journal entry here, an offsetting entry there, a couple more to
adjust the adjustments and then the next quarter needs adjusting
to. Pretty soon you have an MCI or Qwest debacle if the income
stream to support the entries dries up. Nobody expects anything
like that from IBM. IBM is not a MCI or Enron. They are a quality
company that probably pushed some numbers management to the outer
limits and some accountant called them on it. The SEC will 
probably slap their hand and fine them for something so they 
can claim a victory for the little guy. Bottom line, buy IBM 
on weakness over the summer. The PWC and Rational Software 
acquisitions, new server lines and bleeding edge technology in 
an improving economy will win in the end.   

If you want to short something then MSO could be a better target.
According to news reports the SEC is going to file criminal 
charges against Martha Stewart possibly as soon a tomorrow. There
is a strong rumor that she will resign from the company to avoid
further hits to the stock. When this first came out the stock 
dropped to a low of $5.26 but had recovered to $11.65 last Friday.
MSO dropped -$1.68 to $9.50 on Monday. Should she be charged she
has said she will defend herself until proven innocent. This 
means a lot of negative publicity and not good for the stock 
that bears her name. 

Probably the biggest plus for the market came from Greenspan who
gave a mixed message while speaking on monetary policy in Berlin. 
He said when discussing the recovery, "The best we can judge is
that the acceleration has not yet begun even though obviously the
marked moves of the stock market in recent weeks, and especially
the credit markets, are suggesting a fairly marked turnaround."
That remark was spun all day as "Greenspan is expecting a "marked
turnaround." I do not read that into the full sentence. Maybe my
glass is half empty and I am only seeing the negative side. I see
the "acceleration has not yet begun" as no recovery yet. I see 
the marked moves in the market as without basis according to his 
comment. 

On the bullish side he said "inflation is not something of 
significance for the Federal Reserve to be concerned about." Say
what? For years we have feared the inflation monster under the 
bed and suddenly the Fed has decided it is not a problem. Yes, I
am exaggerating. When taken in context he is saying they are much
more afraid of the deflation monster now since inflation is 
virtually nonexistent. He said that deflation, although a low
probability, was a much more important problem and one the Fed
must take action to guard against. Bingo! The rate cut lottery
just sold a few million more tickets. Overall the tone of the
speech was very cautiously bullish. His comments that he "did 
not expect the growth to quicken as much as others expect" kept 
a cautious tone to the message. He said it was important for 
policy makers to consider the possibility they were wrong about 
the future and take out insurance in advance. He even went so 
far as to praise the recent tax cut as fortuitous and happening 
at the right time. The markets loved the speech despite the 
cautious tone and saw it as blank check for stimulus until the 
recovery begins in earnest. 

The Dow sold off -100 plus points at the close on Monday after
touching the electric fence at 9000. The Nasdaq retraced -30 
points in the same period. Traders were holding their breath
overnight afraid that the summer slump had begun. The opening 
dip this morning to 8877 was bought strongly on the Greenspan 
news and despite an afternoon dip the Dow and Nasdaq both 
recovered some of Monday's losses. Most importantly there was 
no follow through to Monday's drop. It appears to be simple 
profit taking and even the -$4 in IBM, roughly -32 Dow points, 
could not hold the Dow back.   

As I said over the last couple weeks, follow the internals. They
are very strong and the dip buyers are alive and well. Until that
changes we need to go with the trend. The new 52-week highs across
all markets came in at 757 compared to only 19 new lows. This is
down from Monday's 1087 new highs DESPITE the afternoon drop. That
is a record for the last 12 months. Before everyone rushes out to 
get a second mortgage we need to recognize that this could still
change at any moment. We still have the Productivity Report and
ISM Services on Wednesday, Factory Orders on Thursday and Nonfarm
Payrolls on Friday. Much more important than the remaining 
economic reports for the week is the Intel mid quarter update on 
Thursday after the bell. Part of the drop on Monday was a rumor
that Intel would warn this week. While it was just a rumor all
eyes will be on the event and the health of the tech sector will
be judged by their comments. Remember the comments from the CEO
two weeks ago? "No recovery in sight, we are hoping for a better
year in 2004." Draw your own conclusions. 

While it is becoming increasingly apparent that no amount of bad 
news can derail the train there is always the possibility of a 
sell the good news event. We are moving into the summer doldrums 
and anything is possible including monotony. The markets do not 
have to go up and we all know how strong Dow 9000 resistance 
should be. After this week the economic reports start slowing 
again and we will be into the warnings cycle for the 2Q. Enjoy 
the train ride while it lasts but keep looking for hijackers to 
appear. If they don't appear we will eventually be talking about 
10,000 just like 9,000 tonight. If they do appear you will 
already have your defensive plans in place.   

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Support holds
Jonathan Levinson

Yesterday's shorter cycles indicated further downside today, but
it was very brief, lasting for only the opening minutes before 
dip buyers appeared, becoming ever-bolder to close near at the 
session's highs. 

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

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
ES03M      979    964    970    966    960
YM03M     8990   8960   8906   8877   8822
NQ03M     1216   1209   1195   1188   1174

10 minute chart of the US Dollar Index 




The US Dollar Index put in a lower high, failing to challenge 
Friday's high below the 94 level.  It sunk through the afternoon, 
finding support at 93.50 as of this writing.  June gold fell but 
never dipped below 363, finding support on the falling dollar.  
The CRB was down 1.12 to 235.66 despite the dollar weakness, with 
platinum futures the only big winner, up better than 2%.

Daily chart of June gold


 

The bigger news today was the buying in treasuries.  The fed 
drained 5.25B in expiring repurchase agreements when it announced 
a 2.5B overnight repo against 7.75B expiring today.  This would 
ordinarily spark selling in treasuries, equities, or both.  
However, bonds rallied, with the ten year yield plunging 8.7 
basis points to 3.342%.


Weekly TNX chart


 


The increasingly low price of money is doing wonders for 
equities, which bounced back from yesterday's lows on light but 
still very respectable volume.


Daily NQ3M candles


 

NQ failed to post a lower low, and bounced, closing near its high 
print and giving us a bullish hammer on the daily candle.  It 
remains near its rally high, now struggling with 1200 resistance, 
still within its bearish ascending wedge but showing little sign 
of exhaustion, particularly given the better than 2B shares 
traded on the COMPX today.  Support is now at 1180 NQ.


30 minute 20 day chart of the NQ3M


 

On the 30 minute candles, we see the stochastic downphase cut 
short and the price revisiting the 1200 support / resistance 
area.  The MacD, which lags the stochastic and works best as a 
confirmatory indicator, is in a bullist up-phase, which suggests 
that the 1200 level will get surpassed.


Daily ES3M candles


 

Like the NQ, the ES returned to the upper trendline of the bear 
wedge, but bounced from a higher level, which is bullish.  It's 
also challenging its upper bollinger band, which the NQ is not.  
Does this mean that the ES is actually leading the NQ for a 
change, or does it mean that this is a false move from the ES? 
We'll know tomorrow.


20 day 30 minute chart of the ES3M


 

The action in the 30 minute candles confirms the strength from 
the daily print.  Note that the MacD has turned up from above the 
zero line, higher than we saw on the NQ contract.  I see 
immediate resistance 973, which should be surpassed by tomorrow's 
open.  Resistance is at 978.


Daily YM3M candles


 


Like the ES, the YM is pushing against its upper bollinger band 
and trendline, and is trending strongly higher on the daily 
timeframe.  This is occurring within a narrowing wedge, but until 
it reverses, the trend remains up.


20 day 30 minute chart of the YM


 

8940 looks like immediate resistance, and this will be challenged 
by tomorrow.  Support has moved up to 8875.

In reviewing the pivots posted above, the weakness in the NQ 
contract is again evident.  The NQ has generally been stronger 
than the ES and YM, but such was clearly not the case today.  
Whether this is telling us that the YM and ES rally is suspect, 
or whether it's merely lagging its peers for a change, we do not 
know.  As the buying that ramped up the US Dollar Index started 
with Europe's open, it's possible that the big for those blue 
chips came from foreign accounts, while the COMPX continues to 
suffer from "window-undressing" after the end-of-month surge last 
Friday.  

Once again, we're left wondering about the relationship between 
equities and treasuries.  I believe that today's action is 
evident that this is a liquidity-fueled rally, with bonds and 
equities breaking out simultaneously.  Even gold, which is 
clearly in a downphase, is finding strong supportive bids above 
360.  It's all idle speculation.  For the moment, "buy the dips" 
remains the clearest strategy- but keep those stops on, in the 
event that those bear wedges assert themselves.


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

Bar-B-QQQ bear ribs

While I certainly don't think traders should be looking to gorge 
themselves on bullish trade, today's ability for the major 
indexes to battle back from their early morning lows and finish 
positive sets the table for yet another place of Bar-B-Q "bear 
ribs" as yet another high is within reach of being violated as 
the major indexes all finished in positive territory.

Today's trade was rather quiet for the major indexes.  While news 
that the SEC was investigation some potential accounting 
irregularities with Intl. Business Machines (NYSE:IBM) $83.82
-4.01%, the declines there were not enough to have this Dow 
component and tech-bellwether keeping the Dow Industrials (INDU) 
8,922.95 +0.28% from posting a 25-point gain and finishing above 
the 8,900 level.

In what may have portended to be a volatile trading session after 
yesterday afternoon's giveback of gains with the Dow Industrials 
finally chiming in with a new 2003 yearly high and joining recent 
2003 index highs from the NASDAQ-100 Index (NDX.X) 1,198.57 
+1.13%, S&P 100 Index (OEX.X) 488.11 +0.56% and S&P 500 Index 
(SPX.X) 971.56 +0.47%, bulls seemed to be willing to hold their 
longs on thought that higher prices along with jittery bears that 
may now be more eager to cover and run then short and hold, kept 
the indexes right at their DAILY pivots, without an intra-day 
trade at a DAILY S1 or R1 level.  Only the S&P Banks Index 
(BIX.X) 306.58% +0.94% was able to trade its DAILY R1 and barely 
so with a session high of 306.61.  Still... destiny may be 
calling the BIX to our 308 reverse head/shoulder objective and 
only the great bear in the sky knows for certain what sector 
bears might do here on a move above 310.

Suffice it to say.... there was little change in today's market.

In fact... it took me until 04:03:17 EST to develop a taste for 
"Bar-B-QQQ bear ribs," with thoughts that a trade at $29.85, 
which would be a session high, into the Q's 04:15:00 PM EST close 
might allow a bull the opportunity for a little further "short-
covering" rally into tomorrow's trade.

I made a screen capture of my QQQ profile and while I too saw a 
"bunch" of intra-day "head/shoulder tops" I see that Jonathan 
Levinson and Linda Piazza also made some reference late in the 
day regarding these technicals that looked to pressed back to the 
upside into the close.

Market Monitor Postings

 

I didn't see Jonathan and Linda's posts until I went to "screen 
capture" the market monitor, but their observations of intra-day 
head and shoulder top patterns may play into a bull's thinking 
that the possibility of some short-covering in tomorrow's trade 
has Monday's highs once again in play.  

Here's a quick look at tomorrow's Pivot Analysis Matrix.  When I 
profiled a bullish QQQ stop at $29.50, I wasn't yet aware that 
$29.50 would be tomorrow's DAILY S1, but at these higher risk 
levels of bullish %, that's just about what I think a shorter-
term bull in the Q's would be looking to risk.

Pivot Analysis Matrix 


 

Intra-day observation I made today were that of shorts still 
being jittery.  These observations came mostly from the QQQ trade 
and I'll discuss the in a moment.  

Make note of Linda's 15:39:10 market monitor post, as we'll look 
at the OEX chart intra-day, but make the "tie" with correlative 
resistance in the DAILY R1 and WEEKLY R1 matrix tomorrow.  This 
is juuuuuust above today's intra-day head/shoulder top pattern 
and "head."  A break much above OEX 490 could then be construed 
as computers lacking much of a "sell bias" and if that's the 
case, then Monday's highs (close to DAILY R2) and WEEKLY R2 of 
496 then in play.

There was a good comment by a floor trader today on CNBC 
regarding technical analysis and how it was purely 
"psychological."  I can't disagree with that, as the market 
prices and trade action are a reflection of the market's 
psychology.  Right now, its my opinion that bulls are simply 
trying to inflict as much damage to bears as they can, especially 
during a period where a bear's psyche is severely vulnerable.  

Still... I think you can see just how bears were "giving it their 
all" in today's trade, especially in the Q's, but also see how 
fragile their psyche is, which I think a QQQ bull now looks to 
expose.

NASDAQ-100 Tracking Stock (QQQ) - 5-minute bars


 

At this point of a bull run, bears are looking for "anything" to 
signal a top.  I'm not talking about Jonathan and Linda being 
"bears," but you can well bet that EVERY trader with a BEARISH 
bias is grasping to find some sign of a top.

I think BEARS were really trying to short that $29.69 level late 
today at what looked to be a "right shoulder" of an intra-day 
head/shoulder top formation, but see that "spike" in volume and 
the move higher once the pattern was negated?  Earlier in the 
day, I actually profiled a bullish trade in the QQQ when the Q's 
had just traded their high of the session at $29.84, but wanted 
to see a move above the $29.85 level and our old upward trend 
from our bullish wedge.  I made note of the "volume break" above 
$29.65, which is 38.2% retracement from our WEEKLY pivot 
analysis.

As I type, the QQQ is trading $29.90, so it looks for now that 
the QQQ might open above this bullish wedge resistance and a 
bulls "first hurdle" on an intra-day basis is going to be $30.02-
$30.05.  This will be a "key level" tomorrow and most likely the 
first place the MARKET would look to sell as this is right where 
Mondays "reversal" took place.  Still.... a bear's psyche is 
fragile and what I think bullish traders will be trying to take 
advantage of at the higher levels of bullish %.  I don't think 
bulls are in here gobbling up the QQQ because of some great value 
or lower risk market environment.

Today's trade saw a net loss of 1 stock to a new point and figure 
sell signal.  This has the NASDAQ-100 Bullish % ($BPNDX) slipping 
from its bull cycle high of 84% to 83%.

S&P 100 Index Chart - Daily Interval


 

Perhaps the most "excitement" for an OEX trader today was to see 
if the OEX would close at its December high of 487.94.  Pretty 
close at 488.11 and the highest close for 2003.  The OEX does see 
and "inside day" on today's trade, which gives the look of 
"neutrality."  I "like" a bearish trade in the OEX on a break 
below today's low of 484.27, stop above yesterday's high at 492.  
Still, I'd only be looking partial positions at this point as 
market internals are still strong.

Shorter-term traders that are monitoring ALL of the major indexes 
during the day, might have noted the QQQ breaking above its 
intra-day head/shoulder top "right shoulder."  Here's the OEX 
intra-day chart, which I've simply placed a retracement bracket 
on to reflect the "head" at 488.93 and "neckline" at 484.25, 
which then gives a downside objective of 479.56, say... 480.

S&P 100 Index (OEX) - 5-minute intervals


 

I've seen more "head and shoulder tops" on the intra-day charts 
than I can count.  There was one pointed out on Friday and when 
it "blew up" Monday morning, bulls were eating some Bear-B-Q 
sandwiches.  It is somewhat notable that today's lows and current 
neckline of a head/shoulder top comes right where Monday 
morning's rally too place.

Yes, there's an intra-day h/s top on the Dow Industrials too, but 
it looks just like the OEX intra-day chart shown above.

Dow Industrials Chart - 50-point box


 

It was on March 17th that the Dow Industrials Bullish % ($BPINDU) 
reversed up to "bull alert" and IBM was one of the 2 stocks to 
generate a new "buy signal" that day and get this very narrow 
bullish % indicator to reverse up from 9.99% to 16.67%.  On March 
17, the Dow closed at 8,141.

IBM may well be a good short candidate as at $83.82, or even $90 
and May highs, the stock had been under performing the Dow 
Industrials and broader S&P 500 Index.  It may well be there had 
been an SEC cloud hanging over the stock.  If you're a Dow 
trader, keep an eye on IBM from here as the "early" buy signal in 
March that helped alert to a new bull shaping up has now seen an 
"early" sell signal develop in the very same stock.

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


 

A trader asked me if I would hold a bearish trade overnight in 
the SPX.  My answer would be yes, and all a bear is doing that 
tries to pick a top, is what every bear should have been doing 
the past 3-months.  Follow with a stop just above the highs.  
Eventually a bear will get it right.  Some bears however, have 
been trying for 3-months and missed one heck of a bullish move 
higher.

This "hold over night" question is that of a short-term oriented 
bearish trader.  At least I'm guessing this.

One thing to think about right now if "wondering" if a SPX put or 
SPY short should be held overnight, is to think about using 
either the SPY as an overnight hedge if you don't like a more 
bullish move into a session's close, which may carry momentum 
into the next session.  Now... this might not be "feasible" in 
the SPY at $97.75 per share.

Can you think of another security, which is "cheaper" with a 
higher beta than the SPX, which might offset some option price 
deterioration NEAR-TERM in a SPX put?  I'm thinking the QQQ 
$28.96.  Maybe some other traders were thinking the same thing 
into today's close as it just didn't seem like bears were getting 
the "big reversal" day they may have been hoping for.

Jeff Bailey


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

Teflon Market
by James Brown

The Teflon market lives on!  Nothing can keep (or get) this stock 
market down, or so it seems.  IBM, the bluest of blue chips, 
announced it was once again the target of an SEC probe late last 
night after the bell.  The news weighed on the markets in after 
hours trading but by morning Big Blue was left to deal with the 
news alone.  Markets recovered although they traded in a narrow 
range throughout most of the session.  

The market's white knight, Alan Greenspan, came charging to the 
rescue with his comments in the Berlin Bankers conference.  The 
Fed head stated that economic data shows signs of a "fairly 
marked turnaround" in the U.S.  However, Greenspan led reporters 
to believe that while the risk of deflation remains low he and 
the other fed governors may be inclined to cut rates as a 
preemptive strike.  

Alan suggested that job growth may begin to pick up in the third 
quarter but that won't help some 14,000 workers for FedEx 
(NYSE:FDX) who just got pink slips.  The company is cutting 12% 
of its labor to cut costs.  The growing job dilemma will become a 
major issue for both the markets and the 2004 election campaign.

Market internals were slightly positive with advancing issues 
beating decliners 15 to 13 on the NYSE and 16 to 15 on the 
NASDAQ.  New highs slipped a tad to 407 but new lows slipped as 
well to 9.  Up volume fell behind down volume on the NYSE but was 
nearly 2:1 on the NASDAQ.  

And now it's broken record time... I keep harping on the bullish 
percent numbers.  My recent mantra has been these are way 
overbought.  Yes, they can keep going but they're all very 
extended.  Risk is in favor of the bears, not the bulls.  Yup, 
that's what I've been saying.  Well, sure enough, they went up 
again.  Remember that readings over 70% are overbought and 
suggest traders should be looking for a correction and/or bearish 
plays not bullish plays.  As of today the Industrials have jumped 
to 73, the S&P 500 has jumped to almost 77 and the S&P 100 has 
jumped to 71 while the NASDAQ-100 has slipped to 83.

I'm more than willing to play the trend and buy the dips but 
we're going to be VERY careful about managing our risk and using 
stops.   


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

Market Averages

DJIA ($INDU)

52-week High:  9801
52-week Low :  7197
Current     :  8923

Moving Averages:
(Simple)

 10-dma: 8716
 50-dma: 8459
200-dma: 8335



S&P 500 ($SPX)

52-week High: 1050
52-week Low :  768
Current     :  972

Moving Averages:
(Simple)

 10-dma:  946
 50-dma:  909
200-dma:  886



Nasdaq-100 ($NDX)

52-week High: 1163
52-week Low :  795
Current     : 1199

Moving Averages:
(Simple)

 10-dma: 1160
 50-dma: 1104
200-dma: 1018



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


No change.  The VIX and VXN continue to churn near their lows.
Yet their refusal to drop further indicates some skepticism 
in the rally's future.

CBOE Market Volatility Index (VIX) = 22.45 +0.22
Nasdaq-100 Volatility Index  (VXN) = 33.51 -0.12

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.93        424,125       330,386
Equity Only    0.90        522,455       488,285
OEX            1.68         12,071        20,283
QQQ            6.59         10,471        69,011


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

Bullish Percent Data

           Current   Change   Status
NYSE          65.7    + 1     Bull Confirmed
NASDAQ-100    83.0    - 1     Bull Confirmed
Dow Indust.   73.3    + 3     Bull Confirmed
S&P 500       76.8    + 3     Bull Confirmed
S&P 100       71.0    + 3     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  1.23
10-Day Arms Index  1.05
21-Day Arms Index  1.25
55-Day Arms Index  1.16


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    1508      1596
Decliners    1346      1485

New Highs     278       129
New Lows        5         4

Up Volume    798M     1340M
Down Vol.    967M      667M

Total Vol.  1787M     2036M

M = millions


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


Commitments Of Traders Report: 05/27/03

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

The large S&P futures contract is not showing much change
this week.  Commercials remain slightly bullish while 
small traders just flipped from slightly bullish to 
slightly bearish.

Commercials   Long      Short      Net     % Of OI
05/06/03      429,519   419,545     9,974     1.2%
05/16/03      429,028   419,553     9,475     1.1%
05/20/03      438,238   426,569    11,669     1.3%
05/27/03      435,195   423,474    11,721     1.4%

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
05/06/03      150,345   148,681     1,664      0.6%
05/16/03      151,883   148,479     3,404      1.1%
05/20/03      157,034   154,980     2,054      0.7%
05/27/03      147,687   149,344    (1,657)     0.6%

Most bearish reading of the year:  (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02
 

E-MINI S&P 500

We are seeing an increase in both long and short positions
for both the small trader and the commercial trader but 
the overall sentiment remains unchanged.  Commercials are
net short and small traders are net long.

Commercials   Long      Short      Net     % Of OI 
05/06/03      169,388   447,330   (277,942)  (45.1%)
05/16/03      178,679   452,727   (274,048)  (43.4%)
05/20/03      232,184   468,006   (235,822)  (33.7%)
05/27/03      252,655   485,962   (233,307)  (31.6%)

Most bearish reading of the year: (337,496)  - 04/29/03
Most bullish reading of the year: (222,875)  - 04/01/03

Small Traders Long      Short      Net     % of OI
05/06/03      423,918    55,932   367,986    76.7%
05/16/03      421,540    57,483   364,057    75.9%
05/20/03      422,555    62,580   359,975    74.2%
05/27/03      427,412    66,031   361,381    73.3%

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


NASDAQ-100

The dead heat between long and shorts in the commercial
positions is narrowing.  Small traders have turned a bit
more bearish with a big increase in shorts compared to last
week's abnormally low reading.

Commercials   Long      Short      Net     % of OI 
05/06/03       46,327     38,216     8,111    9.6%
05/16/03       43,539     39,046     4,493    5.4%
05/20/03       42,864     42,040       824    1.0%
05/27/03       40,999     41,491       492    0.6%

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
05/06/03       13,482    21,010   ( 7,528)  (21.8%)
05/16/03       11,706    16,104   ( 4,398)  (33.0%)
05/20/03       11,024     9,965   ( 1,059)  ( 5.0%)
05/27/03       12,194    13,339   ( 1,145)  ( 4.5%)

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

DJIA futures traders still seem gripped by indecision.
The commercials inched up their short positions by more
than 1000 but remain net long.  The small trader effectively
maintains a net short position but not a very convincing one.

Commercials   Long      Short      Net     % of OI
05/06/03       16,772    13,568    3,204      10.6%
05/16/03       18,265    14,396    3,869      11.8%
05/20/03       18,028    14,108    3,920      12.2%
05/27/03       18,660    15,537    3,123       9.1%

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
05/06/03        7,829     8,642    (  813)   ( 4.9%)
05/16/03        7,873     9,058    (1,185)   ( 6.9%)
05/20/03        8,378     9,922    (1,544)   ( 8.4%)
05/27/03        8,225     9,316    (1,091)   ( 6.2%)

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

Hot "Growth" Funds

These growth driven funds have risen sharply on a quarter-to-date 
basis through June 2, 2003.  By growth, we mean funds that invest 
primarily in growth stocks.  These are stocks of companies, which 
have exhibited faster-than-average increases in earnings over the 
last few years and/or are expected to show high levels of "profit 
growth" over the next few years.  

As made painfully clear during the market correction of 2000-2002 
growth stocks (funds) are riskier investments than average stocks 
(funds), since they sport higher price valuations and make little 
or no dividend payments to shareholders.  However, in bull market 
conditions, such as the QTD period, and over the long run, growth 
stocks (funds) may outperform slower-growing or stagnant stocks 
(funds).  

Our aim this week is to identify some growth stock funds that are 
leading the way in the quarter-to-date period, but that also have 
good long-term records of risk-adjusted performance, using mutual 
fund data from Morningstar and other sources.  Our funds universe 
will include growth funds of all market capitalizations including 
large-cap growth, mid-cap growth, small-cap growth, and multi-cap 
growth funds.

Screening/Evaluation Process

We begin our search this week by using the Fund Finder at the CBS 
Marketwatch.com website (cbs.marketwatch.com).  This quick-n-easy 
tool sorts total returns by fund type, return time period and net 
assets.  We asked for the following criteria:

 Fund Type = Growth
 Return Time Period = Quarter To Date
 Net Assets = All Ranges

We asked for all fund sizes, but you could screen only for larger 
funds with assets over $500 million, or you could screen for tiny 
funds that may be unknown gems.  The CBS Marketwatch.com screener 
quickly identified the top 100 growth funds on a quarter-to-date 
return basis.  We went through the list and identified the funds, 
which are open to new investors and offered in the retail market.  
We removed funds with minimum initial investments of over $10,000 
and funds with expense ratios of over 2.00% to give us only those 
funds that are affordable.

Below is a summary of the "top 25" growth funds based on quarter-
to-date returns as of June 2, 2003 (with approximately two-thirds 
of the quarter in the books).  For load funds, we'll present just 
the Class A shares of the fund, which have front-end load charges 
but generally have the better (lower) relative operating expenses 
per annum. 


   QTD%   Fund Name (Symbol)
  
  +41.4%  Kopp Emerging Growth A (KOPPX)
  +35.6%  Berkshire Focus (BFOCX)
  +34.1%  Federated Kaufmann Small Cap A (FKASX)
  +32.5%  Reynolds Opportunity (ROPPX)
  +31.9%  WM Small Cap Stock A (SREMX)
  
  +28.7%  Nevis Fund (NEVIX)
  +28.6%  Turner Concentrated Growth (TTOPX)
  +27.9%  Van Wagoner Emerging Growth (VWEGX)
  +26.9%  Forum: Winslow Green Growth (WGGFX)
  +26.8%  Marshall Small Cap Growth Inv (MRSCX)
  
  +26.6%  RS Diversified Growth (RSDGX)
  +25.5%  Rockland Small Cap Growth (RKGRX)
  +25.3%  Oberweis Emerging Growth (OBEGX)
  +25.3%  PIMCO: PEA Opportunity A (POPAX)
  +25.3%  Legg Mason Focus Prm (FOCTX)
  
  +25.0%  Putnam Small Cap Growth A (PNSAX)
  +24.6%  Oppenheimer Emerging Growth N (OEGNX)
  +24.6%  SAFECO Growth Opportunities Inv (SAFGX)
  +24.5%  Conseco Growth 20 A (CTWAX)
  +24.5%  ABN AMRO/Veredus Aggressive Growth N (VERDX)
  
  +24.3%  TCW Galileo Small Cap Growth N (TGSNX)
  +24.2%  Federated Kaufmann K (KAUFX)
  +23.9%  Reserve Small Cap Growth R (REGAX)
  +23.8%  FTI Small Capitalization Equity (FTSCX)
  +23.8%  Oberweis Micro Cap (OBMCX)


Some pretty strong returns put up there so far this quarter among 
leading growth-oriented funds.  Many of them have emerging-growth 
mandates, investing in rapidly growing small-to-mid-cap companies 
in the United States.  

From this point, we went through our typical process of reviewing 
and comparing returns, risks, expenses, manager style and tenure, 
and other factors.  In the next section, we tell you which growth 
style funds we like now based on our analysis. 

Our Favorite Funds

If you have a long-term goal and don't mind paying the 5.5% sales 
charge (load), you may want to consider Federated: Kaufmann Small 
Cap Fund A (FKASX) in spite of its very brief history.  This fund 
is co-managed by three portfolio managers, two of which have good 
long-term performance records managing similar funds.  Hans Utsch 
and Lawrence Auriana have co-managed the Morningstar 5-star rated 
Kaufmann Fund (now, a member of the Federated Funds family) since 
its 1986 inception, delivering solid returns over the long run in 
relation to similar funds. 

Because of its success and asset growth, the no-load class shares 
were grandfathered into a new K share class (KAUFX) and new Class 
A, B and C shares were introduced in 2001.  Still, because of its 
large asset size today (approximately $4 billion), the fund holds 
large-cap, mid-cap and small-cap growth stocks, more conservative 
than it was in the early years of its history when it was more of 
a "gunslinger."

The Federated Kaufmann Small Cap Growth Fund is what the Kaufmann 
Fund was years ago in its early days, when it had the small asset 
base to maneuver in and out of small-capitalization growth stocks 
with positive earnings growth.  Utsch and Auriana are responsible 
for the day-to-day management of the fund's portfolio, along with 
Aash Shah, a vice president and senior portfolio manager with the 
Federated Investors Group.

So far this quarter and year, Federated Kaufmann Small Cap Growth 
Fund is outpacing its older sibling, Kaufmann Fund.  The fund has 
gone up 16.1% in the last month, ranking in the 1st percentile of 
the small-cap growth category, per Morningstar.  Through June 2nd 
it has a quarter-to-date return of 34.1%, one of the best returns 
among all diversified equity funds.  But what can you expect over 
the long run?

As this fund grows and matures, we expect it to deliver superior 
returns over time as its older sibling has over the long run for 
risk-tolerant investors.  Since its 1986 inception, the Kaufmann 
Fund has gone up at an annual-equivalent rate of 12.5% per annum, 
still well above the 9%-10% historic norm for U.S. stocks.  Since 
it's smaller and more nimble, we expect the Kaufmann small growth 
product to outperform its older, mid-cap growth-oriented sibling.

Once in the Federated Kaufmann Small Cap Growth Fund, Class A, it 
has a reasonable annual expense ratio of 1.47%.  While that isn't 
the greatest, Utsch and Auriana have shown over long time periods 
that they well compensate investors for the fund's average annual 
expenses incurred.  Like its older sibling, short-term volatility 
is a distinct possibility, but if you're in it for the long haul, 
time has a way of smoothing out the bumps in the road.  Utsch and 
Auriana, again, over time have shown that they can deliver strong 
returns for investors on a risk-adjusted basis.

Another fund we like is ABN AMRO's Veredus Aggressive Growth Fund 
(VERDX).  For an aggressive growth fund, it has done an excellent 
job of limiting volatility over the past three years.  Of all the 
stock funds we looked at this week, it sports the lowest trailing 
3-year average standard deviation of 19.7%.  In 1999, this growth 
style fund produced a whopping 112.6% return, proving that it can 
run with the pack.  In 2000, it managed to hold on to its returns 
from earlier in the year to return 30.2% for investors. 




 


ABN AMRO: Veredus Aggressive Growth Fund is doing very well since 
the market bottomed in March, as the above chart indicates.  Over 
the past month, the fund is up 9.6%, ranking in the top decile of 
the small-growth category, per Morningstar.  It sports a quarter-
to-date return of 24.5%, ranking in the top 25 growth funds list.  
Morningstar currently gives the fund "3 stars" but we believe the 
fund will back in "4-star" territory sooner rather than later, as 
trailing return performance improves with the market.

Conclusion

A couple other pro-growth funds you may want to consider now are 
Oberweis Micro Cap (OBMCX) and Rockland Small Cap Growth (RKGRX).  
Both are currently 4-star rated by Morningstar for risk-adjusted 
return performance relative to similar funds.  Besides Federated 
Kaufmann Fund (KAUFX), they are the only two other funds on this 
week's short list to currently have 4-star or 5-star Morningstar 
overall ratings.  

Some of the stock funds on the list have performed well recently, 
but don't sport strong long-term track records.  For example, the 
Kopp Emerging Growth Fund A (KOPPX) has risen 41.4% so far in the 
second quarter, but is only rated 1-star (lowest) by Morningstar.  
This fund is showing more a "dead cat bounce" that other smallcap 
growth funds, having fallen over 35% in 2001 and over 51% in 2002 
to rank in the small-growth category's bottom decile, according 
to Morningstar.  Over time it has produced below average returns 
for investors, with high risk relative to other small-cap growth 
funds.  So, it may be one to think twice about before diving in.

For more information on any of the funds, visit the appropriate 
fund family websites.    

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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


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The Option Investor Newsletter                  Tuesday 06-03-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: FRE
Daily Results
Call Play Updates: AMGN, BBY, DISH, OHP, SPX, VRTS
New Calls Plays: RJR
Put Play Updates: HDI, IBM, LLL
New Put Plays: ATH


****************
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:
*****

Freddie Mac - FRE - close: 60.85 change: +0.70 stop: 60.51

Here's what we said on Sunday: It's tough being a bear when the 
market is closing at new relative highs and hitting milestones 
that could potentially signal the end of the bear market.  We 
initially added FRE as a put play due to its breakdown out of its 
rising channel and a close under its 200-dma.   This technical 
breakdown was caused by investor concerns that FRE was losing 
market share to its main rival Fannie Mae (FNM).  While FRE is 
doing what it can to remedy the situation Wall Street has not put 
much faith behind its efforts. The rebound appears to be market 
participation only but its painful for bears just the same.  The 
stock has not yet triggered our stop loss at 60.51 but if the ISM 
data is positive we would expect the markets to rally and expect 
FRE to rally with it.  We would NOT suggest new plays at this 
time.

Today: Sure enough, the rally from the ISM data on Monday pushed 
shares of FRE back above the $60.00 resistance level and stopped 
us out at $60.51.  The rebound for FRE continued today but the 
stock is approaching its recent highs near 61.25 and its point-
and-figure chart show it right back at resistance.  Some recent 
reports suggest that if mortgage rates continue to fall and 
Americans continue to refinance it could hurt companies like FRE 
and FNM who don't count on loans being paid off so quickly (to be 
refinanced by other lenders).

Picked on May 25th at $57.90
Change since picked:   +2.95
Earnings Date       07/00/03 (unconfirmed)
Average Daily Volume = 3.4 Million
Chart link:



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

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

CALLS    LAST      Mon   Tue

AMGN     64.06   -1.49   0.51  Still going.
BBY      39.20    1.19  -0.77  Turning 40
DISH     33.05   -0.03   0.18  Slow grind higher
MEDI     36.08   -0.35   0.73  Long-term, no update
OHP      37.62   -0.08  -0.10  Still very cautious
RJR      36.49    0.86   1.09  New, HUGE dividend
SPW      39.00    0.35  -0.15  Also turning 40
VRTS     27.79   -0.63   0.36  Still untriggered

PUTS

ATH      72.38   -1.01  -0.09  New, a bit aggressive
FRE      60.85    0.25   0.70  Drop, we knew it!
HDI      42.95    0.68  -0.23  stuck in the middle
IBM      83.82   -1.58  -3.51  SEC Probe!
LLL      42.40   -0.44  -0.76  Finally some action.

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

Amgen, Inc. - AMGN - close: 64.06 change: +0.51 stop: 62.50

Proving yet again that the trading pattern is intact, AMGN pulled 
back from its new yearly high on Monday, finding support just 
above the $63 level.  This just reinforces our bias to not chase 
breakouts in this stock, but instead to take advantage of the 
subsequent pullbacks as entry points.  Tuesday's session was 
rather lackluster, with the broad market and the Biotechnology 
index (BTK.X) for that matter, trading in a fairly narrow range.  
In sympathy, AMGN's trading was subdued as well with a total 
range of $1.20.  It is encouraging to note that the stock ended 
just a bit below the high of the day and the $63 level once again 
provided a solid floor.  We're now looking to initiate new 
positions on successive rebounds from this area ahead of the 
expected breakout to new highs.  Maintain stops at $62.50, as 
this is just below the intraday lows of the past 5 sessions, as 
well as the 10-dma, which has now risen to $62.85.

Picked on May 11th at    $61.24
Change since picked:      +2.82
Earnings Date          07/22/03 (unconfirmed)
Average Daily Volume = 10.8 mln
Chart link:


---

Best Buy Company - BBY - close: 39.20 change: -0.77 stop: 37.00

Not willing to start the week off in a quiet fashion, our new 
bullish play on BBY rocketed out of the gate on Monday, trading a 
new 11-month high and closing just below critical resistance at 
$40.  We thought it would have taken a bit longer to achieve that 
milestone, but who are we to argue with a move in our favor.  
Profit taking hit the stock on Tuesday and by midday, all of 
those gains from Monday had been wiped clean.  It was do or die 
time for the bulls and they stepped up and supported the stock 
near $38.60 before a late day rise back over the $39 level.  What 
is encouraging about this rebound is that it provides evidence 
that old resistance is now acting as new support.  A dip back as 
low as $38 is still possible, and as long as support holds in the 
$38.00-38.60 area, that dip should make for a favorable entry 
point.  BBY has developed a pattern of consolidating after each 
new breakout in recent weeks, so buying the dips will serve 
traders better than chasing the breakouts.  Recall that our 
upside target for the play is $44, and with our stop set at $37 
(just below the top of the 5/28 gap), the risk-reward ratio is 
nicely in our favor.  We note that Briefing.com has updated their 
earnings date to match that on Yahoo! (6/18), so this play 
officially has a 2-week fuse.

Picked on June 1st at    $38.70
Change since picked:      +0.50
Earnings Date          06/18/03 (unconfirmed)
Average Daily Volume = 4.04 mln
Chart link:


---

EchoStar Communications - DISH - cls: 33.05 chg: +0.18 stop: 
30.90

We actually have some more news on DISH but it doesn't appear to 
be significant.  The company announced that it signed a deal with 
CompUSA, allowing the computer/hardware retailer to use 
EchoStar's business TV system to communicate with its workforce.  
The other news involves a tiff with Allbritton Communications 
over service contracts for four local stations in different 
markets.  Shares of DISH continue to build (slowly) on its trend 
of higher lows and more conservative traders might be able to get 
away with a tighter stop loss than we have suggested.  DISH is 
approaching its recent high near $34.00 and bulls need to see a 
breakout but given the timid climb recently it may need to test 
it and then pull back again to build up more steam.   

Picked on May 21st at $31.10
Change since picked:   +1.95
Earnings Date       05/06/03 (confirmed)
Average Daily Volume = 3.3 million
Chart link:


---

Oxford Health - OHP - cls: 37.62 chg: -0.10 stop: 36.00

Despite our cautious comments this weekend shares of OHP have 
continued to creep higher.  The stock gapped up on Monday but has 
spent the last two sessions trading between $37.50 and $38.15.  
Super conservative traders not willing to risk any more capital 
can snug their stop up under the $37.00 level but then almost any 
market wide dip might stop them out.  We continue to be cautious 
and only recommend new plays if applied with our suggested stop 
loss or tighter.  Shares remain very overbought and in need of a 
pull back but the overall strength in the markets is so 
overpowering the bulls might be able to keep prices climbing.  
Currently, shares of OHP are dealing with resistance created back 
in DEC'02 through JAN'03.  Should we get a move through $38.50 it 
will be time to start aiming for an exit near $40.00.  Maybe 
OHP's management can offer some positive comments to get the 
stock moving faster at the June 10th Goldman Sachs 24th Annual 
Global Healthcare Conference.

Picked on May 20th at $36.51
Change since picked:   +1.11
Earnings Date       05/05/03 (confirmed)
Average Daily Volume = 857 thousand
Chart link:


---

SPX Corp. - SPW - close: 39.00 change: -0.15 stop: 36.75*new*

It was nice to see a bit of follow-through to Friday's breakout 
on Monday, but as expected, there's some solid resistance in the 
$39.50-40.00 area.  After almost tapping the top of that 
resistance zone on Tuesday, SPW saw some selling into the end of 
the day, but still managed to hold (just barely) the $39 level at 
the close.  Keep in mind that the $37.50 level was significant 
resistance, and it wouldn't be at all surprising to see that 
level tested to confirm it as new-found support before SPW is 
able to charge through the $40 level.  We're not interested in 
chasing breakout moves at this point -- the time for that was on 
last week's move through the $37.50 level -- instead, we want to 
focus on buying the dips.  A rebound from $38.50-39.00 is medium 
odds, but a solid rebound from $37.50 would look quite favorable 
for new positions.  Note that our next upside target is near 
$41.25, which is the convergence of the 200-dma, historical 
resistance and just below the bottom of the gap from mid-
December.

Picked on May 27th at    $36.86
Change since picked:      +2.14
Earnings Date          07/22/03 (unconfirmed)
Average Daily Volume = 1.08 mln
Chart link:


---

Veritas Software -VRTS - close: 27.80 change: +0.37 stop: 24.50

The waiting game continues.  VRTS has yet to provide us with what 
we've requested in terms of an entry point, so the play remains 
untriggered tonight.  That said, price action is looking quite 
constructive, with a dip back to just above $27 being all the 
bears could manage the past two days.  We're still looking for a 
dip back to the $26.00-26.25 area to trigger the play, as a 
retest of that broken resistance will provide a much clearer 
picture of the longevity of the current uptrend.  If that 
pullback takes more than a couple days from here, than the 20-dma 
will likely come into play as well, currently sitting at $25.33 
and rising about 20-cents per day.  It's difficult to practice, 
but patience is the key right now.

Picked on May 29th at    $27.24
Change since picked:      +0.56
Earnings Date          07/23/03 (unconfirmed)
Average Daily Volume = 9.05 mln
Chart link:



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

RJ Reynolds Tobacco - RJR - cls: 36.49 chg: +1.09 stop: 33.95

Company Description:
R.J. Reynolds Tobacco Holdings, Inc. is the parent company of 
R.J. Reynolds Tobacco Company and Santa Fe Natural Tobacco 
Company, Inc. R.J. Reynolds Tobacco Company is the second-largest 
tobacco company in the United States, manufacturing about one of 
every four cigarettes sold in the United States. Reynolds 
Tobacco's product line includes four of the nation's 10 best-
selling cigarette brands: Camel, Winston, Salem and Doral. Santa 
Fe Natural Tobacco Company, Inc. manufactures Natural American 
Spirit cigarettes and other tobacco products, and markets them 
both nationally and internationally. (source: company press 
release)

Why We Like It:
Tobacco companies have two things going for them these days: 
positive court decisions and high dividends in a dividend 
friendly environment.  It was only a couple of weeks ago that an 
appeals court overturned the $145 billion "Engle" judgment 
against multiple tobacco companies (RJR being one of them).  The 
huge penalty was delivered in July of 2000 when a jury decided 
that the major U.S. cigarette companies were liable for the 
illness of hundreds of thousands of Florida smokers (Reuters).  
An appeals court threw out the decision and the penalty claiming 
the case should have never been tried as a class-action suit.

Tobacco stocks surged on the news.  Wiping away a $145 billion 
black cloud offers a lot more breathing room for the entire 
industry.  Yet the business of cigarettes may still face 
challenges with higher taxes, growing anti-smoking campaigns 
across the states and Europe, and what some analysts believe will 
become a price war (at least domestically) cutting margins but 
overseas markets and high dividends will continue to tempt 
investors with profits.  RJR has a dividend currently worth 
10.7%.  Now that the President has signed the recent tax cut bill 
significantly reducing taxes on dividends suddenly RJR becomes a 
much more viable investment.  

We like the breakout over the $36.00 level today, which produced 
a double-top buy signal on the point-and-figure chart.  Volume 
has been very strong the last two weeks and we believe RJR should 
be able to trade through overhead resistance at $39.00 and tag 
the $40.00 mark near its descending 200-dma.  We're going to 
start the play with a stop loss near $34.00.

Suggested Options:
There are less than three weeks left for June options so traders 
should take that into consideration, especially since the broader 
markets are in need of a pull back.  We'd suggest July strikes.

BUY CALL JUN 35.00 RJR-FG OI=3364 at $1.70 SL=0.85
BUY CALL JUN 37.50 RJR-FU OI=1240 at $0.45 SL=0.00
BUY CALL JUL 35.00 RJR-GG OI= 581 at $2.10 SL=1.00 premium=$0.60
BUY CALL JUL 37.50 RJR-GU OI= 265 at $1.00 SL=0.50
BUY CALL AUG 37.50 RJR-HU OI= 956 at $1.40 SL=0.70

Annotated Chart on RJR:


 

Picked on June 3rd at $36.49
Change since picked:   +0.00
Earnings Date       07/25/03 (unconfirmed)
Average Daily Volume = 1.6 million 
Chart link:



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

Harley Davidson - HDI - close: 42.95 change: -0.23 stop: 43.75

So far this week, HDI investors have been subjected to a tight-
range game of ping-pong, with the stock bouncing between the 
$42.50 and $43.00 levels.  Neither the bulls or the bears have 
been able to gain an advantage, and so we wait to see who will be 
victorious.  Just as with the intraday charts, the daily presents 
a somewhat muddled picture.  Price is holding near its highs 
since last week's rebound from just above $40, but at the same 
time, volume is falling off (only about two-thirds the ADV on 
Tuesday), and the 20-dma (currently $43.10) is acting as 
resistance.  All the while, daily Stochastics are rising towards 
overbought.  At this point, it looks like the play is going to go 
our way once the oscillators tip over again, but we really won't 
have confirmation of weakness until HDI breaks and closes back 
under its 50-dma, currently at $42.02.  Aggressive traders can 
look to enter new positions near the top of the current range to 
as high as $43.25 (the top of the 5/23 gap), on the expectation 
that resistance will hold and lead to a rollover later in the 
week.  Just make sure to keep those stops in place at $43.75.  A 
breakout over that level would convincingly demonstrate that the 
downtrend is over for now.

Picked on May 25th at   $40.81
Change since picked:     +2.14
Earnings Date         07/16/03 (unconfirmed)
Average Daily Volume = 2.73 mln
Chart link:


---

Intl Business Machine - IBM - cls: 83.82 chg: -3.51 stop: 
88.01*new*

Every once in a while this game we call the market can throw you 
a bit of good luck.  Bears who were shorting IBM under resistance 
at $90 were happy to hear that Big Blue is under yet another SEC 
probe.  The company disclosed the probe last night after the bell 
and the news had a very detrimental affect on the overnight 
futures but by morning the broader markets had recovered and IBM 
was left to feel the sting alone.  Investor sentiment appears to 
be somewhat split over how to react to the news.  IBM stated that 
they believe the SEC probe into IBM's revenue-recognition 
practices for 2000 and 2001 is actually part of an SEC probe into 
one of IBM's customers.  This particular division of retail store 
point-of-sale operations is not a very large part of IBM's 
business.  Many analysts speculate that if IBM had to restate 
earnings for any transactions related to this customer it would 
be very limited indeed.  

However, the bigger issue here is investor confidence in IBM's 
credibility.  The company has endured multiple SEC probes in the 
last few years and Big Blue's earnings results have been 
questioned before with massive stock buybacks to manage the EPS 
numbers. More than one analyst stated today that there is no way 
to tell if the SEC probe will widen into IBM's affairs or not.  
Still, professionals on Wall Street appear divided between 
downplaying the news and being more cautious on the company.  One 
critic claimed that IBM's choice of words for disclosure of this 
SEC probe and the company's limited guidance on the issue does 
not speak well of the future.  The 4% drop today is just the 
beginning if the SEC investigation gets worse for Big Blue.  More 
importantly for short-term traders is investor perception of the 
risk.  Rest assured that IBM will do whatever they can to hide, 
mask and downplay the event.  

As a follow up to Sunday's comments about the triangular wedge in 
shares of IBM on a longer-term basis, this breakdown is very 
bearish for the stock.  Shares closed below its 50-dma on huge 
volume of 21 million shares.  Our short-term target is just 
$80.00 and IBM could get there quickly as this story develops.  
We're going to adjust our stop to $88.00 but more conservative 
traders have alternatives (please see the chart below).  We did 
note that this move creates a fresh double-bottom breakdown on 
IBM's point-and-figure chart and support is in the $78-79 range.  
The stock did bounce from its lows and it could see a small 
rebound to $85.00 before rolling over again.  Put premiums are 
going to be a lot more expensive than yesterday.  Plan 
accordingly.

Annotated Chart of IBM:


 

Picked on May 29th at $87.36
Change since picked:   -3.54
Earnings Date       04/14/03 (confirmed)
Average Daily Volume = 8.2 Million
Chart link:



---

L-3 Comms -LLL - close: 42.40 change: -0.76 stop: 44.10*new*

What do you know?  Sometimes those chart patterns do tell us the 
truth.  LLL finally showed some weakness yesterday afternoon and 
cracked below the bottom of its rising bear flag channel at the 
close.  But we really didn't have the confirmation needed until 
today's session when the stock firmly lost the $43 level and 
actually traded within a few pennies of the $42 before rebounding 
with the rest of the market to round out the session.  In 
addition to the $42 level being historical support, the 50-dma at 
$41.92 is providing some stabilization to the stock.  Despite 
that underlying support, LLL looks like it is finally going to 
crack to the downside, with daily Stochastics now in full bearish 
roll and today's increase in selling volume.  Traders that 
followed our advice to target entries on a rollover below $44 are 
looking good tonight, and if the rollover we're watching is for 
real, then the $44 level shouldn't be tested again.  For that 
reason, we're getting a bit more aggressive with our stop 
tonight, lowering it to $44.10.

Picked on May 20th at   $41.94
Change since picked:     +0.46
Earnings Date         07/22/03 (unconfirmed)
Average Daily Volume = 1.38 mln
Chart link:



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

Anthem, Inc. - ATH - close: 72.38 change: -0.09 stop: 75.50

Company Description:
Anthem is a health benefits company serving over 7 million 
members, primarily in Indiana, Kentucky, Ohio, Connecticut, New 
Hampshire, Colorado and Nevada.  The company owns the exclusive 
right to market its products and services using the Blue Cross 
Blue Shield (BCBS) names in these states under license agreements 
with the Blue Cross Blue Shield Association.  ATH's product 
portfolio includes a diversified mix of managed care products, 
including health maintenance organizations (HMOs), preferred 
provider organizations (PPOs) and point-of-service (POS) plans, 
as well as traditional indemnity products.  The company's managed 
care plans and products are designed to encourage providers and 
members to select cost-effective healthcare by utilizing the full 
range of its medical management services.

Why we like it:
Charging ahead to new all-time highs on Monday, the Health Care 
Payor's index (HMO.X) was looking incredibly strong. But with the 
pullback at the end of the day, the $660 resistance level held 
firm and mild weakness prevailed throughout the day on Tuesday.  
But what has really gotten our attention is the action in ATH, 
which has been diverging from the strength in the HMO index for 
the past couple weeks.  After failing to break long-term 
resistance at $75 on a closing basis, the stock has been trending 
downwards in a clear display of relative weakness.  There wasn't 
anything to suggest a good bearish play until today, though.  The 
stock has been trending higher in a steady ascending channel 
since the middle of February, with each test of the bottom of 
that channel being met by eager buyers.  But today, they appeared 
to appear in sufficient numbers to keep ATH in the channel, and 
today's close looks particularly bearish.  After a slight gap 
down this morning, the stock spend the entire day underwater and 
closed below both the bottom of that channel and the 20-dma 
(currently $72.83).  There was a slight lift into the close in 
sympathy with the rebound in the broader market, but the opening 
gap held as resistance.  

Given the underlying bullishness in the broad market and in the 
HMO sector lately, we aren't expecting the bulls to just give up 
and go home.  So a bit of a rebound is exactly what we're looking 
for to provide a solid entry.  The $74 level looks like pretty 
solid resistance right now, after turning back the bulls on 
Thursday and Friday and then again yesterday.  A failed rebound 
there would set the stage for a continuation lower towards our 
initial target of $69, currently right at the site of the 50-dma.  
A further drop towards stronger support at $68 or even $66 is 
certainly possible, but we'll just take it one target at a time 
for now.  Considering the solidity of the top at $75 over the 
past couple weeks, we should be safe placing our stop initially 
at $76, right at the 5/20 intraday high.  We aren't advocating 
entries on a breakdown below today's intraday lows unless it 
comes on much stronger volume than what we've seen this week -- 
roughly two-thirds of the ADV.  Look for confirmation of weakness 
from the HMO index before playing.  Given ATH's relative 
weakness, if the HMO index starts to weaken, then ATH should lead 
to the downside.

Suggested Options:
Short-term traders will want to focus on the June 75 Put, as it 
will provide the best return for a short-term play.  Those 
looking for a larger move down below the $70 level will want to 
utilize the July 70 Put, which provides greater insulation from 
the spectre of time decay.  

BUY PUT JUN-75 ATH-RO OI=445 at $3.20 SL=1.50
BUY PUT JUN-70 ATH-RN OI=639 at $0.80 SL=0.40
BUY PUT JUL-70 ATH-SN OI= 96 at $1.75 SL=1.00

Annotated Chart of ATH:


 

Picked on June 3rd at   $72.38
Change since picked:     +0.00
Earnings Date         07/30/03 (unconfirmed)
Average Daily Volume = 1.20 mln
Chart link:



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


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

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**************************************************************
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The Option Investor Newsletter                  Tuesday 06-03-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: Put - ATH


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

Anthem, Inc. - ATH - close: 72.38 change: -0.09 stop: 75.50

Company Description:
Anthem is a health benefits company serving over 7 million 
members, primarily in Indiana, Kentucky, Ohio, Connecticut, New 
Hampshire, Colorado and Nevada.  The company owns the exclusive 
right to market its products and services using the Blue Cross 
Blue Shield (BCBS) names in these states under license agreements 
with the Blue Cross Blue Shield Association.  ATH's product 
portfolio includes a diversified mix of managed care products, 
including health maintenance organizations (HMOs), preferred 
provider organizations (PPOs) and point-of-service (POS) plans, 
as well as traditional indemnity products.  The company's managed 
care plans and products are designed to encourage providers and 
members to select cost-effective healthcare by utilizing the full 
range of its medical management services.

Why we like it:
Charging ahead to new all-time highs on Monday, the Health Care 
Payor's index (HMO.X) was looking incredibly strong. But with the 
pullback at the end of the day, the $660 resistance level held 
firm and mild weakness prevailed throughout the day on Tuesday.  
But what has really gotten our attention is the action in ATH, 
which has been diverging from the strength in the HMO index for 
the past couple weeks.  After failing to break long-term 
resistance at $75 on a closing basis, the stock has been trending 
downwards in a clear display of relative weakness.  There wasn't 
anything to suggest a good bearish play until today, though.  The 
stock has been trending higher in a steady ascending channel 
since the middle of February, with each test of the bottom of 
that channel being met by eager buyers.  But today, they appeared 
to appear in sufficient numbers to keep ATH in the channel, and 
today's close looks particularly bearish.  After a slight gap 
down this morning, the stock spend the entire day underwater and 
closed below both the bottom of that channel and the 20-dma 
(currently $72.83).  There was a slight lift into the close in 
sympathy with the rebound in the broader market, but the opening 
gap held as resistance.  

Given the underlying bullishness in the broad market and in the 
HMO sector lately, we aren't expecting the bulls to just give up 
and go home.  So a bit of a rebound is exactly what we're looking 
for to provide a solid entry.  The $74 level looks like pretty 
solid resistance right now, after turning back the bulls on 
Thursday and Friday and then again yesterday.  A failed rebound 
there would set the stage for a continuation lower towards our 
initial target of $69, currently right at the site of the 50-dma.  
A further drop towards stronger support at $68 or even $66 is 
certainly possible, but we'll just take it one target at a time 
for now.  Considering the solidity of the top at $75 over the 
past couple weeks, we should be safe placing our stop initially 
at $76, right at the 5/20 intraday high.  We aren't advocating 
entries on a breakdown below today's intraday lows unless it 
comes on much stronger volume than what we've seen this week -- 
roughly two-thirds of the ADV.  Look for confirmation of weakness 
from the HMO index before playing.  Given ATH's relative 
weakness, if the HMO index starts to weaken, then ATH should lead 
to the downside.

Suggested Options:
Short-term traders will want to focus on the June 75 Put, as it 
will provide the best return for a short-term play.  Those 
looking for a larger move down below the $70 level will want to 
utilize the July 70 Put, which provides greater insulation from 
the spectre of time decay.  

BUY PUT JUN-75 ATH-RO OI=445 at $3.20 SL=1.50
BUY PUT JUN-70 ATH-RN OI=639 at $0.80 SL=0.40
BUY PUT JUL-70 ATH-SN OI= 96 at $1.75 SL=1.00

Annotated Chart of ATH:


 

Picked on June 3rd at   $72.38
Change since picked:     +0.00
Earnings Date         07/30/03 (unconfirmed)
Average Daily Volume = 1.20 mln
Chart link:



************************Advertisement*************************
If you trade options online, then you need an online broker that:
offers true direct access to each option exchange
offers stop and stop loss online option orders
offers contingent option orders based on the price of the option or 
stock
offers online spread order entry for net debit or credit
offers fast option executions

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

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


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

Please read our disclaimer at:
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For more information on advertising in OptionInvestor Newsletter,
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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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