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Daily Newsletter, Tuesday, 07/15/2003

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The Option Investor Newsletter                 Tuesday 07-15-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Bond Blues Back
Futures Markets: Big Moves
Index Trader Wrap: See Note
Market Sentiment: Bullish or bearish?
Weekly Fund Screen: Japan Stock Funds


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      07-15-2003           High     Low     Volume Advance/Decline
DJIA     9128.97 - 48.20  9238.01  9091.30 1.91 bln   1048/2182
NASDAQ   1753.21 -  1.60  1777.78  1742.10 1.87 bln   1413/1793
S&P 100   504.07 -  1.12   508.56   501.82   Totals   2451/3975
S&P 500  1000.42 -  3.44  1009.61   996.67
W5000    9640.98 - 35.60  9727.87  9605.24
RUS 2000  475.93 -  2.10   480.85   474.47
DJ TRANS 2573.97 +  1.10  2596.86  2565.46
VIX        21.84 +  0.43    22.34    21.30
VXN        33.95 +  0.06    34.59    32.81
Total Volume 4,018M
Total UpVol  1,430M
Total DnVol  2,407M
52wk Highs  744
52wk Lows    22
TRIN       0.87
PUT/CALL   0.54
************************************************************

Bond Blues Back

It is not nice to tease the bond junkies especially when they are
holding the fate of the economy in their hands. Greenspan talked
a big bluff and said all the right things but his words fell on
deaf ears. The bond bulls ran for cover despite threats of lower
rates ahead.

Dow Chart - Daily



Nasdaq Chart - Daily




Economic reports were good but traders did not applaud. The weekly
Chain Store Sales rocketed +0.9% for the week ended July 12th and
produced the largest back to back weekly gains since April. Summer
weather and steep discounting reportedly produced the gains. Stores
saw increased traffic as rains dried up in the eastern part of the
country.

The Monthly Retail Sales jumped +0.5% and was inline with estimates
despite a dip in auto sales. Some employers have already started
reducing tax deductions for workers and that money is finding its
way into the stores. While that may be the case on a very limited
basis the far more likely reason was the current weather and the
massive discounting to blow out Easter, Mothers Day and Fathers
Day goods that were not sold due to bad weather then.

The NY Empire State Manufacturing Survey posted the third monthly
consecutive gain and was strongly positive at 22.6. That was the
official spin on the headline number. That headline number actually
fell from 27.6 in June and inventories, back orders, delivery times,
prices received and employment all dropped into negative territory.
Unfilled order backlog fell to -5.7 from +2.6. Delivery fell to
-6.4 from +3.1. Employment fell to -8.6 from zero. Prices received,
you know that "unwelcomed decrease in inflation" fell to -14 as
pricing power continues to erode. The six-month outlook began to
erode as well with a drop to 52.5 from 58.9. I am not saying this
was a negative report but it was not as positive as the talking
heads tried to spin it.

The biggest economic news for the day was not a report but a speech
by Greenspan to Congress. The event was not without controversy and
a major amount of grandstanding. Greenspan touted the numerous ways
he felt the economy was poised to recover and the panel pointed out
the numerous things he had done wrong and why the plan would fail.
It was not your regular "praise meeting" full of "we have the utmost
respect for you" comments. Panel members continually pounded him
with verbal assaults so severe that other members publicly
apologized for their behavior. Yes, it is an election year and
Alan was forced to be the fall guy for the reelection crowd.

Alan said the FOMC was prepared to make substantial additional rate
cuts to keep the economy on track and to use other weapons at their
disposal for a long time to come. Unfortunately nobody believed him.
With the Fed funds rate at 1.00% he admitted that any additional
rate cuts could hurt interest rate sensitive businesses like money
market funds as well as destroy retirement investments for millions
of people who depend on CDs and short term interest bearing accounts
for income. Alan did not win any friends there and the bond junkies
laughed behind his back at what they considered an obvious bluff.

He also shot himself in the foot on the threat to use other weapons
after he closed the speech with "However, given the now highly
stimulative stance of monetary and fiscal policy and well-anchored
inflation expectations, the Committee concluded that economic
fundamentals are such that situations requiring special policy
actions are most unlikely to arise." If the situation is most
unlikely to arise then the bond market promptly ignored it and
rushed to sell their bonds. The Ten year sold off a full two points
and the 30-year a full three points. Yields on the 30-year nearly
hit 5% and the ten year hit 3.968%. The interest sensitive stocks
got killed with home builders selling off substantially along with
utilities. It was a rout as bonds hit three-month lows and gave
no indications that anything was going to change. Suddenly the
Fed's carefully crafted plan to keep interest rates low simply
disintegrated before their eyes. With refinancing applications
falling -22% last week and rates soaring this week there could be
an even bigger drop off ahead. The refi consumer as the pillar of
the recovering economy has died. It is now time for the business
community to step up to the table or the winter may begin early.

Adding to the concern was the newly released budget numbers showing
the deficit for 2003 to be -$455 billion and 2004 to be -$475
billion. Oh, did you know that the 2004 numbers do not include any
spending for Iraq? Considering it is currently costing $4 billion
a month and the best estimates are for another 2-3 years then we
could easily add $50 billion to every estimate for years. That
puts us well over $500 billion for 2004 without trying. Greenspan
was asked if we could tax cut ourselves back into prosperity and
I do not need to tell you the answer. Long-term investors are very
worried that this massive debt load coupled with a sputtering
economy could combine to squelch the recovery before it starts.
(just reporting here, not expressing an opinion) If the economy
was firing on all cylinders then deficit spending would add to the
fuel and power the rocket. The bottom line was bond junkies running
for cover and selling bonds with both hands.

This is normally good for the market if that cash is headed for
equities but there was no cash flowing in that direction today.
The problem it appears is the carry trade. That means hedge funds,
mutual funds, large corporate borrowers, etc, borrow short term
money from various sources like Japan where interest rates are
near zero and buying long term bonds in the U.S. That works well
as long as bonds are going up or are stable but with bonds falling
through the floor those trades have to be unwound quickly. The
key level according to the bond junkies is a 4.0% yield on the
ten year. Should that level be broken the amount of debt that
would begin to unwind could be over a trillion dollars. This
massive fund shift could cause ever escalating rates to the point
where they spiral out of control and begin to feed on themselves.
What a wonderful web of interrelated dependencies we feed on.

The point here is the Fed has lost control and they are at the
mercy of the markets. They really do not have any bullets left in
their gun and the bluff is not working. Greenspan will have an
opportunity to try and improve his delivery and restate his case
when he repeats his testimony to the Senate. Don't look for any
new facts to appear but the delivery should be drastically
different. He will have seen the bond drop today and be trying
to grasp at any straw to recover control. Going to be an uphill
task.

The earnings week is in full swing with over 25% of the S&P
announcing earnings this week. The companies already announced
have run the gamut of massive charges from companies like Boeing,
massive losses from derivatives like FNM and massive warnings like
Lucent but what else is new. Add in the funny numbers like the ETN
gains from tax rate changes and just plain earnings misses from
companies like RMBS. It is not your normal earnings season but
after the bell today we saw the first major tech try to steal
some positive headlines.

INTC beat the street by a penny and edged slightly past revenue
estimates. They raised their gross margin estimates for the
remainder of the year due to product mix and the slow demise of
the AMD competition. BUT, after a rocket ramp in the futures after
the announcement, Andy Bryant, the Intel spin doctor appeared on
CNBC and said it was not a recovery yet. He said it was more like
a return to normalcy where the tech improvements over the last
two years were starting to pay off in profits. Intel stock paused
for a few moments and then soared ahead as shorts raced to cover.
The futures however rolled over immediately and have been drifting
down ever since. Remember the good news from YHOO and JNPR were
met with selling as the good news was already priced in. The Intel
news may have surprised those that were expecting a normal 2Q miss
as has occurred in the past and that lack of a miss is powering
the INTC stock.

Also hurting the after hours trading were misses or warnings from
LU, TER, SCHL, PHTN, ELON, IKON, CDN, PVSW and Motorola. Several
companies met or slightly beat estimates and guided inline with
estimates. Inline will get you nothing in a market that is priced
to perfection. If you cannot guide higher and beat then you are
toast. Wait, YHOO and JNPR beat and guided higher and they were
still clobbered. Get the point?

Besides an instant replay of Greenspan on Wednesday we will get
the CPI, Business Inventories, Industrial Production, Housing
Index and Mortgage Survey. All the majors will be out before the
market opens and should provide plenty of economic fodder for the
bond bulls to chew on instead of Greenspan. The big gun for
tomorrow is IBM after the close. That could be one more nail in
the coffin if they do not blow the doors off their estimates.
Offsetting the INTC gains in the Dow will be weakness in Citigroup
after they announced at the close a $6 billion buy of Sears
troubled credit card division. C was trading down after hours.
Also, MO is still under pressure after an Illinois court said the
previous court was in error when it changed the bond requirement.

The markets are poised to run but the direction is unclear. It
was announced today that the recent "fat finger" trades in the
Dow and S&P futures were real trades and were not errors after all.
This is a sobering thought. The volume of trades required to push
the Dow futures to near 8600 last week and the S&P to 990 on Monday
are huge. These are normally dealt out in small doses and the
multiple large sell orders hitting the market all at once have
scared many traders out of taking long positions. This undercurrent
of uncertainty right at the time that the market normally peaks in
July is giving added influence to the dance with the Fed.

I have talked about it for several weeks now and the time is at
hand. This is the week that would typically see the July peak and
the beginning of the July slide. Once IBM, MSFT and the other 25%
of the S&P companies announce this week the earnings outcome for
all companies will be known. There will be no reason to wait
around for the next surprise because there will be no more
surprises. Sure some will beat and some will miss but historically
the majority of the good earnings come this week from the giant
blue chips. That leaves the rest of the pack bringing up the rear.

If you are watching a marathon with tens of thousands of runners
once the leaders cross the finish line the excitement fades. You
may still have a friend that you are waiting for buried deep in
the pack but the rest of the faces become a blur once the leaders
break the tape and draw the crowd of reporters. All attention will
be on INTC, IBM and MSFT and then bonds and then the second half
economy. If the bulls are going to pull a July rally out of their
hat then this is the week to do it. If they can't do it this week
then it is all over but the shouting. The next ramp job typically
begins in August and that gives traders a couple weeks or more to
shuffle portfolios based on the July results and guidance for the
remainder of the year. Did I mention this is option expiration
week as well?

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Big Moves
Jonathan Levinson

Tuesday was a spectacular session, punctuated by big moves in the
biggest of markets, currencies and treasuries.  We also saw
upside spikes in NDX option volatility and extreme low readings
in the CBOE put to call ratio.  Equity futures saw a mostly
orderly decline.

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

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
ES03U     1019   1010   1002    994    986
YM03U     9282   9199   9131   9048   8980
NQ03U     1327   1312   1299   1284   1272


10 minute chart of the US Dollar Index


The US Dollar Index rocketed to the upside from 10AM onward.  I
will attempt not to dwell on Chairman Greenspan's comments today,
but we need to know that he was talking up the economic recovery
scenario, and showed less enthusiasm about outright purchases of
long-dated treasuries and other extraordinary measures.  Treasury
bonds cratered, gold and commodities cratered, equities slid from
their highs to close lightly negative, and the Dollar rallied.

My thesis is that the removal of the Greenspan Put under
treasuries was sufficient to scare the speculative buyers, whose
selling begat more selling.  By the same token, the potential for
a narrowing of the interest rate differential between US
treasuries and foreign bonds would create a bid for dollars, as
climbing rates and yields are bullish for a currency.  To boot,
the Bank of Canada abruptly reversed course and lowered rates by
25 basis points, exacerbating the effect of the Fed Chairman's
actions today.  The lack of vision by the Bank of Canada, which
hiked rates twice just a few months ago in an environment of
rising unemployment, and has sold a large portion of its total
gold reserves in the past quarter of this year, is an
embarrassment to me as a Canadian.

Bullish dollars are bearish for gold and other commodities
measured in those dollars, and we saw the CRB whacked for 1.67 to
233.12.  Gold got sold as well.


Daily chart of August gold




There's little to say, with August gold printing a low just above
340 and closing at 342.90, right at the 343 support line we've
been watching for the past months.

Daily chart of the ten year note yield




Treasuries sold off as Chairman Greenspan spoke with Congress on
his statements that the Fed wouldn't be as enthusiastic about
buying treasuries to keep the long yield down.

The effects gave us answers to a number of questions.  First off,
it was not a bear wedge on the above chart of the ten year
treasury note yield, with a failure to break back below the
ascending trendline.  Secondly, equity indices went negative
today, with huge spikes in options volatility noted at various
points throughout the session.  With this quality of selloff in
treasuries, asset allocation theorists would have predicted a
massive bid in equities.  As well, the fed announced a large
overnight repo in the amount of 9B, which was a net addition of
3B against yesterday's expiring overnight repo of 6B.

Despite all of this "freed up" liquidity, equities could not find
a bid.  Their decline was very orderly, but it was still a
decline.


Daily NQ candles




It's becoming repetitious, but once again, the daily uptrend was
not a factor in the day's action/  Cyclically, the Macd histogram
is hinting at a pullback as the stochastics and Macd approaching
the tops of their upphases.

30 minute 20 day chart of the NQ




On the 30 minute candles, the ascending trendline on the bear
wedge was not tested today, with price ticking back up into the
close.  While today saw a lower high and lower low, there was no
sign of breakdown from the ascending bearish wedge.

Daily ES candles




The selling in ES also brought us a lower high and lower low, but
again no challenge of the daily uptrend.

20 day 30 minute chart of the ES




ES found a bottom on the 30 minute candles at the lower trendline
of its ascending wedge, and the oscillators are indicating the
first ticks of the next upphase.  The higher lows on the Macd and
stochastics would be bullish and could project to new rally highs
above 1015 without violating the bearish ascending wedge.

150 tick ES candles




That said, the action of the tape was not bullish today, with
only the uptick into the close to encourage bulls.  The short
cycle oscillators were already growing toppy on it, and so it
remains dubious whether the upphase on the 30 minute candles
above will be able to carry the ES and set the short cycle
oscillators trending in overbought.  We'll know tomorrow.

Daily YM candles




Nothing to add on the YM.

20 day 30 minute chart of the YM




We will watch tomorrow for
continuations of today's moves in the larger markers, and a
possible reversal higher in equities.  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_071503_1.asp


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

Bullish or bearish?

Equities declined today as treasuries made huge moves lower and
the US Dollar Index moved higher.  We also witnessed a large
spike in options volatility for the Nasdaq 100 as measured by the
QQV, which added just under 10% to close at 30.45, while the VIX
gained .43 to 21.84 and the VXN .06 to 33.95.

We generally expect to see an increase in options volatility on a
down day, but the spike in the QQV was out of the ordinary.
Meanwhile, the CBOE put to call ratio was printing extreme
readings, but to the downside, with the equity put to call ratio
below .40 for most of the session, and the total put to call
ratio barely clearing .50.

The spike in the QQV is a panic-type indication, while the put to
call data reflected just the opposite.  How do we read it?

Options volatility increases as options premium increases.  On
its own, it indicates that one of the two parties to a trade
wants the contract badly enough to pay extra for it.  The put to
call ratio at low levels indicates a predominance of call volume
over put volume.  It appears that the market was willing to pay
more for QQQ calls today in particular.  The VIX and VXN made
gains, but nothing approaching that of the QQV.

To determine whether the action was bullish or bearish depends on
which party was doing the buying.  If it was institutions buying
back QQQ calls of which they were short, the action would appear
bullish to me, while if it was dip-buyers actively going long QQQ
calls in anticipation of a blast higher, it looks more bearish.


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

Market Averages

DJIA ($INDU)

52-week High:  9353
52-week Low :  7197
Current     :  9128

Moving Averages:
(Simple)

 10-dma: 9131
 50-dma: 8928
200-dma: 8431



S&P 500 ($SPX)

52-week High: 1015
52-week Low :  768
Current     : 1000

Moving Averages:
(Simple)

 10-dma:  996
 50-dma:  970
200-dma:  899



Nasdaq-100 ($NDX)

52-week High: 1316
52-week Low :  795
Current     : 1294

Moving Averages:
(Simple)

 10-dma: 2380
 50-dma: 1200
200-dma: 1061



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


There isn't much more to say about the VIX and VXN tonight that
Jon didn't already mention above.  As expected on the down market
day, these two both edged higher but not by any significant amount.

CBOE Market Volatility Index (VIX) = 20.72 -0.81
Nasdaq-100 Volatility Index  (VXN) = 32.80 -0.86

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.54        738,400       395,388
Equity Only    0.40        602,842       241,528
OEX            0.66         39,943        26,619
QQQ            0.38         73,599        28,096


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

Bullish Percent Data

           Current   Change   Status
NYSE          73.1    + 0     Bull Confirmed
NASDAQ-100    81.0    + 1     Bull Confirmed
Dow Indust.   83.3    - 3     Bull Confirmed
S&P 500       80.0    + 1     Bull Confirmed
S&P 100       83.0    + 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  1.10
10-Day Arms Index  1.06
21-Day Arms Index  1.18
55-Day Arms Index  1.14


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    1020      1354
Decliners    1856      1666

New Highs     185       300
New Lows       12         3

Up Volume    605M      772M
Down Vol.   1212M     1113M

Total Vol.  1831M     1905M

M = millions


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

Commitments Of Traders Report: 07/08/03

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

There was little change last week in the large S&P contracts.
It appears both big and small traders are waiting to see how the
initial burst of Q2 earnings come in and how investors react to
them.


Commercials   Long      Short      Net     % Of OI
06/17/03      519,887   501,401    18,486     1.8%
06/24/03      405,382   447,526   (42,144)   (4.9%)
07/01/03      415,976   453,005   (37,029)   (4.3%)
07/08/03      415,053   453,720   (38,667)   (4.5%)

Most bearish reading of the year: (111,956) -  3/06/02
Most bullish reading of the year:   18,486  -  6/17/03

Small Traders Long      Short      Net     % of OI
06/17/03      202,040   184,028    18,012     4.6%
06/24/03      159,405    85,182    74,223    30.3%
07/01/03      150,232    75,937    74,295    32.8%
07/08/03      152,239    74,749    77,490    34.2%

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

The same holds true for the commercials here in the e-minis,
as they appear to be waiting before making any big commitments.
However, we've seen a drastic turnaround in the small traders
sentiment going from extremely bullish to know the most bearish
in months.


Commercials   Long      Short      Net     % Of OI
06/17/03      306,279   661,114   (354,835)  (36.6%)
06/24/03      150,208   201,724    (51,516)  (14.6%)
07/01/03      175,893   216,993    (41,100)  (10.5%)
07/08/03      192,815   224,124    (31,309)  ( 7.5%)

Most bearish reading of the year: (354,835)  - 06/17/03
Most bullish reading of the year:  (41,100)  - 07/01/03

Small Traders Long      Short      Net     % of OI
06/17/03      466,837    70,609   396,228    73.7%
06/24/03       84,081    44,347    39,734    30.9%
07/01/03       57,639    67,449     9,810     7.8%
07/08/03       56,394    72,090    15,696    12.2%

Most bearish reading of the year:   9,810   - 07/01/03
Most bullish reading of the year: 449,310   - 06/10/03


NASDAQ-100

NASDAQ futures remain in a holding pattern.  Commercials
remain net short and small traders remain net long.


Commercials   Long      Short      Net     % of OI
06/17/03       60,964     65,561    (4,597)  (3.6%)
06/24/03       28,780     47,425   (18,645) (24.4%)
07/01/03       28,662     48,265   (19,603) (25.5%)
07/08/03       30,489     48,311   (17,822) (22.6%)

Most bearish reading of the year: (19,603)  - 07/01/03
Most bullish reading of the year:   9,068   - 06/11/02

Small Traders  Long     Short      Net     % of OI
06/17/03       29,400    23,232     6,168    11.7%
06/24/03       24,519     7,064    17,455    55.3%
07/01/03       26,777     8,498    18,279    51.8%
07/08/03       26,136     9,035    17,101    48.6%

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

DOW JONES INDUSTRIAL

Ditto here too.  There's almost no change in the commercials'
net long position in the Industrial futures and there is
a small bump in the small traders net short position.


Commercials   Long      Short      Net     % of OI
06/17/03       20,625    18,593    2,032       5.1%
06/24/03       19,373    11,565    7,808      25.2%
07/01/03       20,504    11,871    8,633      26.7%
07/08/03       20,752    11,860    8,892      27.3%

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
06/17/03        9,092     9,398    (  306)   ( 1.6%)
06/24/03        5,950     7,442    (1,492)   (11.1%)
07/01/03        5,799     6,822    (1,023)   ( 8.1%)
07/08/03        5,005     8,093    (3,088)   (23.6%)

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

Japan Stock Funds

This week, we'll tell you our favorite Japan stock funds based on
relative returns, risk and expense.  Japan country funds received
some attention at the recent Morningstar conference, when leading
stock picker, Bill Miller (Legg Mason) told an audience that they
should consider one country, Japan, and one stock, Sony, now.  So
it seems appropriate that we should look at this forlorn category
as well.

According to Morningstar, the average Japan fund has risen about
10% over the past month and about 20% over the past three months
through July 3, 2003.  However, Japan stocks have rallied before
only to fizzle out again, so this may be yet another false rally.
Therefore, we think it's important to choose a Japan equity fund
that maintains tight risk controls and seeks solid risk-adjusted
results for investors over the long-term.

Screening/Evaluation Process

To screen Japan stock funds, we used Morningstar's fund screener
at www.morningstar.com.  All we did was set Morningstar Category
equal to "Japan Stock" and the screener quickly identified about
50 Japan stock funds to consider, including load funds with more
than one share class.  So, really there are 20-25 Japan funds to
consider.

In terms of Morningstar ratings first, three Japan country funds
currently receive a 5-star (highest) rating from Morningstar for
risk-adjusted performance relative to category peers, including
Fidelity Japan Small Company (FJSCX), Japan Fund S (SJPNX), and
Vanguard Pacific Stock Index Fund (VPKIX).  Note, however, that
the VPKIX symbol reflects the fund's institutional class shares.

We looked next at YTD total return performance through July 3rd,
and saw that Dimensional Japanese Small Company Fund (DFJSX) has
a YTD return of 34.2%, highest among Japan stock funds.  However,
it has a $2 million minimum initial investment and is off limits
to most retail investors.  The second highest YTD return belongs
to ProFunds UltraJapan Inv (UJPIX) up 18.5%, followed by Japan S
(SJPNX) up 17.6%.

Japan Fund S (SJPNX) is the oldest and one of the largest Japan
equity funds on the retail market - with $223 million in assets.
For years, the portfolio was managed by Scudder Investments but
in October 2002, Fidelity Investments took the management reins.
The fund currently has an expense ratio of 1.57%, below average
in relation to the average Japan stock fund.

The $385 million Fidelity Japan Smaller Companies Fund (FJSCX),
managed by Kenichi Mizushita since the end of 1996, soars when
Japanese small-caps do but it has also been more volatile than
other Japan stock funds.  Returns have been so strong, however,
that Morningstar still awards the fund a 5-star highest rating
for relative risk-adjusted performance.

At $1.8 billion, Vanguard Total Pacific Stock Index (VPACX) is
the largest Japan stock fund on the market.  The fund's retail
share class performance hasn't been quite as strong as its "I"
institutional class shares, resulting in a less favorable star
rating from Morningstar.  VPACX is rated 3 stars, while VPKIX,
the fund's institutional class shares, are rated 5 stars.

In the next section, we'll tell you which of these funds we like
now and why.

Our Favorite Funds

In the Japan fund group, we like The Japan Fund Class S (SJPNX),
the first and oldest Japan stock fund.  Jay Talbot, a portfolio
manager with Fidelity Investments Japan Ltd since 1996, has run
the portfolio since March 1, 2003.  He manages six mutual funds
for Fidelity Investments.






As of July 7, the Japan Fund had a YTD return of 22.9%, ranking
it in the top 6% of the Japan stock category, using Morningstar
numbers.  The fund's 22.9% YTD return was also more than double
the return of the MSCI EAFE developed markets index.  The Japan
Fund is up 31.6% in the last three months through July 7, 2003.

Conclusion

Passive investors may prefer the low-cost Vanguard Pacific Stock
Index Fund (VPACX) but the fund's retail share class performance
hasn't been quite as strong as its institutional share class.  I
would tend to give the nod to Fidelity Investments for their top
global research capability.  And, I like the fact that portfolio
manager, Jay Talbot is based in Japan.  The local presence helps.

For more information or to download a fund prospectus, go to the
Japan Fund website at www.japanfund.com.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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The Option Investor Newsletter                  Tuesday 07-15-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: AMGN, PHM
Dropped Puts: None
Call Play Updates: AGN, DGX, EBAY, GS HAR, LOW, OMC, PCAR
New Calls Plays: None
Put Play Updates: BLL, HD, INTU
New Put Plays: LEN


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

Amgen, Inc. - AMGN - close: 71.54 change: +1.05 stop: 68.50

Part of success in the market is knowing when to take the money
and run.  That time has arrived for our AMGN play.  When we
initiated coverage of this bellwether Biotech stock 3 weeks ago,
we were targeting an initial move to $70, with a possibility of a
run to $72, which was the PnF bullish price target.  The initial
target was achieved last week and Tuesday's early bullishness had
the stock trading briefly above $72.  Target achieved, so it is
time to harvest those gains and move on.  For those of you that
are greedy enough to want to hold out for one more push higher
ahead of next week's earnings report, we'd recommend stops be
placed no lower than last Friday's intraday low of $69.50.

Picked on June 24th at     $65.05
Change since picked:        +6.49
Earnings Date             07/22/03 (confirmed)
Average Daily Volume =   9.93 mln
Chart link:


---

Pulte Homes - PHM - close: 60.68 change: -2.01 stop: 60.50

The reaction in the bond market to Greenspan's testimony today
sent the homebuilders plummeting.  The idea of higher interest
rates had investors running to sell shares of their big winners.
Higher interest rates would slow down home sales and put the
brakes on this group's stellar performance.  While we're not
technically stopped out yet (our stop is 60.50 and the low today
was 60.54) the failed rally at $64.00 and its 50-dma was enough
to convince us that PHM may see $55 before it sees $70 again.


Picked on July 01 at $63.52
Change since picked:  -2.84
Earnings Date      07/24/03 (confirmed)
Average Daily Volume:   767 thousand
Chart =



PUTS:
*****

None


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

Allergan, Inc. - AGN - close: 80.34 change: -0.81 stop: 78.50

What's it going to be -- a double top or an actual breakout?  AGN
has been knocking on the door of major resistance in the $81.50-
82.00 area (the site of the mid-June highs) for over a week now,
but without the ability to break out.  While we'd like to see the
stock decisively break that resistance and march up towards our
$84-85 target, we're pleased to see the pattern of higher lows
over the past couple weeks.  The biggest problem we can see is
the sharp increase in selling volume on Tuesday afternoon as the
stock fell to close at its session lows.  Resistance at $82 and
support at $79, that's the picture with which we are presented.
Another rebound from the $79 area can be used for new entries.
The risk-reward is nicely balanced for new positions on such a
setup, with our stop set at $78.50.  Those looking for a momentum
trade will need to see AGN clear the $82 level before playing and
should target a quick exit in the $84-85 area.  Recall that the
company is set to release earnings next Wednesday before the
open, so there is only one more week for this play to achieve our
target.

Picked on June 26th at     $78.74
Change since picked:        +1.60
Earnings Date             07/23/03 (confirmed)
Average Daily Volume =    1.06 mln
Chart link:


---

Quest Diagnostics - DGX - close: 66.05 change: -0.40 stop: 64.75

As convincing as last week's breakout looked, DGX is not behaving
in the bullish manner that we were looking for.  The first
problem arose last Friday when the stock gapped down below $66 in
response to a CIBC downgrade.  Following that gap, DGX rebounded
strongly to end the day back over $67 and it looked like traders
that bought the dip got a great entry point.  The price action
this week isn't looking quite so encouraging though, as the stock
has apparently found resistance near the top of last Friday's gap
and both of the past two days have seen the stock closing near
its low of the day.  This is the critical test, as DGX needs to
find support in the $65.50-66.00 area and put in a convincing
rebound to demonstrate that old resistance really is new-found
support.  All we've seen so far since early last week is a
breakout and then drop back near support.  Bulls need to see the
rebound from support, or DGX is likely to lapse back into its
prior trading range between $61-66.  New entries should only be
considered on a volume-backed rebound from support at this point,
as we keep our stops in place at $64.75, just below the 20-dma.

Picked on July 1st at     $65.78
Change since picked:       +0.27
Earnings Date           07/22/03 (unconfirmed)
Average Daily Volume =     913 K
Chart link:


---

eBay Inc - EBAY - close: 113.13 change: -0.82 stop: 110.99

We're down to the last few trading days before EBAY's big Q2
earnings report.  Bulls should still be happy with the stock's
relative strength, especially as the markets drift lower today.
There isn't much new to add to our play.  If the broader markets
can stay positive then we could see a last minute ramp up of
momentum into EBAY's earnings report.  There is the possibility
of a stock split announcement with their earnings but at the
moment that concept remains speculation.  We raised our stop loss
over the weekend to $110.99.  Those traders trying to minimize
risk might want to up their stop loss to just under the 10-dma.
Due to the brief time frame, we would not suggest new plays at
this time.

Picked on June 27th at $104.05
Change since picked:     +9.08
Earnings Date         07/22/03 (unconfirmed)
Average Daily Volume =    6.76 million
Chart link:


----

Goldman Sachs Grp. - GS - cls: 88.02 chng: -1.42 stop: 85.50*new*

Most sectors of the market ended in the red on Tuesday, but the
standout exception was the Broker/Dealer index (XBD.X), which
managed to end with a 0.47% gain.  MER beat earnings estimates
this morning by a country mile and rose sharply at the open,
maintaining most of their gains into the close and dragging
several other sector components along for the ride.  Our GS play
soared at the open, briefly trading above $90 early in the day.
But then the bears came out to play and the stock gave back all
its early gains and then some.  Fortunately, the stock managed to
(just barely) hang onto the $88 level at the close and we'll need
to watch for a rebound from this area.  Recall the inside day we
mentioned over the weekend?  That pattern was definitely resolved
in favor of the bulls, as GS blasted through the top of
Thursday's range at the open yesterday, and tested those highs
again before deteriorating this afternoon.  Raise stops to
$85.50, which is the top of last Monday's opening gap.

Picked on July 1st at      $85.85
Change since picked:        +2.17
Earnings Date             09/24/03 (unconfirmed)
Average Daily Volume =    4.41 mln
Chart link:


---

Harman Intl - HAR - close: 83.74 change: -0.06 stop: 79.49 *new*

Shares of HAR have yet to disappoint us.  The stock keeps
climbing the upper edge of its rising channel.  Traders looking
for new entry points might want to consider a dip and bounce from
the $82.00 level.  Today's six-cent loss in the face of broader
market profit taking underscores HAR's relative strength.  We're
going to raise our stop to $79.49, keeping at or under the rising
21-dma.

Picked on July  6th at $80.26
Change since picked:    +3.48
Earnings Date        08/19/03 (unconfirmed)
Average Daily Volume =    321 thousand
Chart link:


---

Lowe's Companies - LOW - cls: 47.09 chng: -0.12 stop: 44.25*new*

Following last week's breakout over $46.50, we were wondering
where shares of LOW would find their next level of resistance.
That answer has been delivered over the past 2 days, as LOW has
twice found resistance in the $47.50-48.00 area.  The huge
selloff in Treasuries on Tuesday certainly didn't help, as it
raises the likelihood that the next round of refinancing activity
will fail to appear.  But one day does not make a trend and we're
primarily focused on the bullish technical pattern produced by
last week's breakout.  Based on that, we now want to see LOW find
support at former resistance and should the stock bounce from
above $46.00, that should make for the next high-odds entry
point.  Should a sharper decline unfold (depending on broad
market action) more aggressive traders might even consider buying
a dip and bounce from the $45 level, which should be very strong
support.  Note that stops have been raised to $44.25, just below
the 20-dma.

Picked on July 13th at    $46.87
Change since picked:       +0.22
Earnings Date           08/18/03 (unconfirmed)
Average Daily Volume =  4.87 mln
Chart link:


---

Omnicom - OMC - close: 72.88 change: -1.32 stop: 69.99

If you were looking for another chance to buy OMC at its rising
30-dma, this is it.  Shares rallied strongly on Monday but faded
with the broader markets and that weakness continued into
Tuesday's session.  The go-go momentum traders may still want to
wait for a new relative high over the $76 level but the
conservative traders could look at entries here and tighten their
stop to really reduce risk.  The Merrill Lynch fund managers
monthly survey revealed that "smart" money is turning optimistic
on cyclical stocks and that means media plays like OMC.  While
the big red candle (today) isn't encouraging, the cautious can
wait for OMC to show a little strength before evaluating new
positions.

Picked on July 13 at $73.97
Change since picked:  -1.09
Earnings Date      07/29/03 (unconfirmed)
Average Daily Volume:  1.66 million
Chart =


---

PACCAR Inc. - PCAR - close: 72.74 change: +0.22 stop: 69.95 *new*

Traders have about six market days left before PCAR's Q2 earnings
report.  If we're going to get any pre-earnings run up it needs
to show up soon.  The consolidation over $70.00 doesn't
necessarily concern us, especially with the markets down today.
However, we'd like to get a bit more conviction on the bounces.
It's possible the bulls are just waiting to hear the Q2 numbers
before making any new moves.  Given the brief time frame left
prior to earnings we would not suggest new positions.  We're also
going to raise our stop loss to $69.95.

Picked on July 08 at $73.49
Change since picked:  -0.75
Earnings Date      07/24/03 (confirmed)
Average Daily Volume:  1.24 million
Chart =



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

None


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

Ball Corp. - BLL - close: 42.58 change: -0.69 stop: 45.00*new*

What do you know, gravity still works.  Last week's Buy rating
from BofA appeared to do nothing for the stock other than remove
another layer of support.  The following day the stock broke
below recent support, found weak support near $44 towards the end
of the week and looked poised for a bounce coming into this week.
"Not so fast", said the bears and the stock has had a couple of
solidly bearish days, closing below $43 today for the first time
since August.  Note how price action has been sliding lower along
the lower Bollinger band.  We aren't likely to see a plunge
significantly below that lower band, but barring a bullish
catalyst, the trend looks like it will continue down towards our
initial target of $40.  Once that level is reached, we would
expect a decent bounce and that means it will be time for more
conservative traders to harvest gains.  Should a bounce
materialize before that, look for resistance to hold near $44.50.
This is the site of the intraday highs from last Thursday and
Friday, as well as the site of the 10-dma.  A failed rebound here
would provide for another solid entry point enroute to reaching
the $40 level.  Note that we've lowered our stop to $45.00
tonight, which is just above what should be strong resistance.

Picked on July 8th at    $45.14
Change since picked:      -2.56
Earnings Date          07/24/03 (confirmed)
Average Daily Volume =    636 K
Chart link:


---

The Home Depot - HD - close: 33.17 change: -0.21 stop: 34.75

Just looking at the closing prices would give the mistaken
impression that nothing has happened with HD yet this week, as
the stock ended on Tuesday exactly at Friday's closing level.
But there's been some decent price action over the past couple
days, most notably yesterday's rally to, and then subsequent
rollover from, the $34 level, precisely where we were looking for
an entry into the play.  There's a big spike in the opening bar
from Tuesday that extended all the way to $34.55, but due to a
complete lack of subsequent trading near that level, we're
inclined to dismiss it as bad data.  Beginning with the rollover
near 2pm ET on Monday, the intraday price action looks like a 'b'
distribution pattern, which ought to see bearish continuation
down towards major support near $32.  Aggressive traders can
consider entries on a break back below $32.95, as that would have
the stock entering last week's gap and then have the $32 level in
play.  More conservative traders that want to enter on weakness
will want to see a clear move under the 50-dma ($31.95) before
opening new positions.  Maintain stops at $34.75 until support
gives way.

Picked on July 10th at   $32.43
Change since picked:      +0.74
Earnings Date          08/19/03 (unconfirmed)
Average Daily Volume =  9.46 mln
Chart link:


---

Intuit Inc - INTU - close: 43.21 change: -0.78 stop: 45.55

It's been somewhat of an interesting week for INTU.  Not only did
they reaffirm fiscal year 2003 and 2004 to be inline with current
estimates but they bought another privately held software
company.  Monday, Intuit Inc. announced it had acquired privately
held Income Dynamics, the makers of "ItsDeductible" software
program.  Intuit said the acquisition would have no "material"
affect on its earnings numbers.  Given the positive concept of
reaffirming numbers and the neutral acquisition, there was little
reaction by shareholders.  The stock continues to churn under
resistance of $45 and now its 50-dma.  Those looking for more of
a confirmation of weakness can wait for a move back under the $43
level.  Cautious traders could also consider inching their stops
down to $45.00.

Picked on July 8th at $43.35
Change since picked:   -0.14
Earnings Date       08/13/03 (unconfirmed)
Average Daily Volume =   4.1 million
Chart link:



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

Lennar Corp. - LEN - close: 71.12 change: -3.43 stop: 75.30

Company Description:
Lennar Corporation has two core businesses, homebuilding and
financial services.  The company's homebuilding operations
include the sale and construction of single-family attached and
detached homes, as well as the purchase, development and sale of
residential land directly and through its unconsolidated
partnerships.  Its financial services subsidiaries provide
mortgage financing, title insurance, closing services and
insurance agency services for both buyers of its homes and
others, and sell the loans they originate in the secondary
mortgage market.

Why we like it:
Over the past month, we've taken a couple of bearish swipes at
the Housing sector on thoughts the group was too extended and in
addition to the normal profit taking, could see some serious
selling in response to rising interest rates.  Despite whatever
the Fed is trying to do, interest rates (as measured by Treasury
yields) got a serious dose of adrenaline on Tuesday, with the Ten
Year Yield shooting up 0.20% to its highest level since early
May.  If this action continues, then regardless of what happens
with short-term rates, rising bond yields could very quickly kill
off the still-strong housing boom.  Regardless of what the long-
term outcome is, this is the fear that investors sitting on a
pile of profits from the past 4 months is going to have to
contend with.  We think there's some serious downside in store in
the coming weeks and what better way to play it than using a Home
Building stock that is right on the edge of a serious breakdown?
LEN has been building a series of lower highs in recent weeks and
Tuesday's sharp reversal right at that descending trendline
certainly plays into the hands of eager bears looking for a large
a tasty meal.  The stock's decline on 7/01 came to a halt right
at $69.75.  Looking at the PnF chart, we can see that we're still
early on this aggressive play, as there is not yet a Sell signal
to work with.  But when LEN trades $69, we'll have that Sell
signal and the vertical count will give us a target of $61.

Looking at the historical chart shows strong support from the
prior highs in the $62-63 area, and in our opinion, that's close
enough for an eventual target to shoot for.  LEN has been
volatile with the rest of the Housing stocks, and it will likely
continue to be so, making this a more aggressive play.  But with
that added risk, could come added reward, if the stock does break
down.  Aggressive traders may want to target shoot entries on
successive failed rallies below that $75 descending trendline.
On the other hand, traders willing to wait for confirmation can
use a trade under $69.75 to trigger new momentum entries.  As a
confirming indicator, keep an eye on the Dow Jones Home
Construction index ($DJUSHB).  If our LEN play is going to go in
our favor, then the index should not be able to bounce back over
the $460 level on a closing basis.  On the other hand, if it were
to break below the 7/01 low of $424, that would provide added
confirmation that the bears are finally in control.  Set initial
stops at $75.30, just above today's intraday high, as well as the
descending trendline.

Suggested Options:
Aggressive short-term traders will want to focus on the August 70
Put, as it will provide the best return for a short-term play.
With the volatility seen in the Home Building stocks lately, more
conservative traders may want to use the August 75 contract,
which is currently in the money and less susceptible to the
ravages of time decay when August becomes the front month at the
end of the week.  Since there is nearly 2 months to the company's
next earnings release, we've also listed a NOV contract, for
those traders looking to take advantage of a longer-term move.

BUY PUT AUG-75 LEN-TO OI= 998 at $5.70 SL=3.75
BUY PUT AUG-70 LEN-TN OI=3110 at $2.95 SL=1.50
BUY PUT NOV-70 LEN-WN OI= 696 at $6.10 SL=4.00

Annotated Chart of LEN:




Picked on July 15th at   $71.12
Change since picked:      +0.00
Earnings Date          09/09/03 (unconfirmed)
Average Daily Volume =  1.55 mln
Chart link:



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

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call 1-888-889-9178 or click for more information.

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


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

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


**************************************************************
ADVERTISING INFORMATION

For more information on advertising in OptionInvestor Newsletter,
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Contact Support
The Option Investor Newsletter                  Tuesday 07-15-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: LEN (PUT)
Futures Corner: Performance Report - Part 2

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

Lennar Corp. - LEN - close: 71.12 change: -3.43 stop: 75.30

Company Description:
Lennar Corporation has two core businesses, homebuilding and
financial services.  The company's homebuilding operations
include the sale and construction of single-family attached and
detached homes, as well as the purchase, development and sale of
residential land directly and through its unconsolidated
partnerships.  Its financial services subsidiaries provide
mortgage financing, title insurance, closing services and
insurance agency services for both buyers of its homes and
others, and sell the loans they originate in the secondary
mortgage market.

Why we like it:
Over the past month, we've taken a couple of bearish swipes at
the Housing sector on thoughts the group was too extended and in
addition to the normal profit taking, could see some serious
selling in response to rising interest rates.  Despite whatever
the Fed is trying to do, interest rates (as measured by Treasury
yields) got a serious dose of adrenaline on Tuesday, with the Ten
Year Yield shooting up 0.20% to its highest level since early
May.  If this action continues, then regardless of what happens
with short-term rates, rising bond yields could very quickly kill
off the still-strong housing boom.  Regardless of what the long-
term outcome is, this is the fear that investors sitting on a
pile of profits from the past 4 months is going to have to
contend with.  We think there's some serious downside in store in
the coming weeks and what better way to play it than using a Home
Building stock that is right on the edge of a serious breakdown?
LEN has been building a series of lower highs in recent weeks and
Tuesday's sharp reversal right at that descending trendline
certainly plays into the hands of eager bears looking for a large
a tasty meal.  The stock's decline on 7/01 came to a halt right
at $69.75.  Looking at the PnF chart, we can see that we're still
early on this aggressive play, as there is not yet a Sell signal
to work with.  But when LEN trades $69, we'll have that Sell
signal and the vertical count will give us a target of $61.

Looking at the historical chart shows strong support from the
prior highs in the $62-63 area, and in our opinion, that's close
enough for an eventual target to shoot for.  LEN has been
volatile with the rest of the Housing stocks, and it will likely
continue to be so, making this a more aggressive play.  But with
that added risk, could come added reward, if the stock does break
down.  Aggressive traders may want to target shoot entries on
successive failed rallies below that $75 descending trendline.
On the other hand, traders willing to wait for confirmation can
use a trade under $69.75 to trigger new momentum entries.  As a
confirming indicator, keep an eye on the Dow Jones Home
Construction index ($DJUSHB).  If our LEN play is going to go in
our favor, then the index should not be able to bounce back over
the $460 level on a closing basis.  On the other hand, if it were
to break below the 7/01 low of $424, that would provide added
confirmation that the bears are finally in control.  Set initial
stops at $75.30, just above today's intraday high, as well as the
descending trendline.

Suggested Options:
Aggressive short-term traders will want to focus on the August 70
Put, as it will provide the best return for a short-term play.
With the volatility seen in the Home Building stocks lately, more
conservative traders may want to use the August 75 contract,
which is currently in the money and less susceptible to the
ravages of time decay when August becomes the front month at the
end of the week.  Since there is nearly 2 months to the company's
next earnings release, we've also listed a NOV contract, for
those traders looking to take advantage of a longer-term move.

BUY PUT AUG-75 LEN-TO OI= 998 at $5.70 SL=3.75
BUY PUT AUG-70 LEN-TN OI=3110 at $2.95 SL=1.50
BUY PUT NOV-70 LEN-WN OI= 696 at $6.10 SL=4.00

Annotated Chart of LEN:




Picked on July 15th at   $71.12
Change since picked:      +0.00
Earnings Date          09/09/03 (unconfirmed)
Average Daily Volume =  1.55 mln
Chart link:



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FUTURES CORNER
**************

Performance Report - Part 2

I recently ran across this conversation with Jack Schwager
(author of the Market Wizards series) and his thoughts on trading
with a strategy.

"Question: Now, focusing on the technical aspects, what benefits
do you see in having a mechanical trading strategy?

Jack: Well, the tremendous advantage is a lot less wear and tear
on your psyche. I’ve been in both places as a human trader and a
strategy trader and I will tell you it’s a lot more comfortable
being a purely systematic trader. You don’t have to worry about
the market going violently against you. If you have a purely
systematic approach, the strategy will get you out. But most
importantly, you don’t agonize over the decision-making. Do I get
out now? Should I give it another day or two? Should I add? The
system will take care of all the decisions. By definition, as a
strategy trader, you shouldn’t try to second guess or anticipate
the system signals. So, there’s a lot less emotional wear and
tear with a systematic approach. I find it much more comfortable
to trade that way.

This brings up another pointwhat’s right for me is right for me
and may be right for some other people, but it certainly is not
right for everyone. Each person must find an approach that is
personally comfortable. You need to trade an approach that fits
your personality. For example, I’m analytical and I don’t enjoy
making emotional decisions or being a gunslinger. For me, trading
automated is far more comfortable than trying to trade while
making decisions on when to pull the trigger. However, you can
give a really good trading strategy to somebody whose personality
is not in tune with it, and I guarantee you
it will not work.

Question: For those traders who are just starting out to develop
a strategy, what essential factors do you think they should
consider?

Jack: In one of my books, I use the line “There are a million
ways to make money in the markets. The irony is that they’re all
very difficult to find.” The emphasis is that there are a million
ways to do it. That means everybody has got to find his or her
own path. I think anybody who says, “You really have to use daily
and weekly charts and everything shorter term is just a waste of
time,” is just talking nonsense. As is, the person who says,
“Daily and weekly charts are much too long. Markets act much too
quickly. You really should use tick charts.” They’re both wrong.
There is no have to. You can come up with perfectly good
methodologies using any time frame or using no charts at all. It
comes down to what you naturally gravitate toward."

Here is a another comment on mechanical trading from Larry
Connors (co-author of Street Smarts with Linda Raschke) "I've
always been a big believer in using mechanical entries with
somewhat mechanical exits as a way to trade. As I've mentioned
over and over, I'll let the guys who like to guess do what they
do. For me, I need statistical evidence that something works,
and, just as importantly, I only want to trade strategies that
make sense. They need to be strategies that are trading an
inherent market condition in order to better assure they'll work
in years to come (there's never any guarantees to any of this but
again, in my opinion, it's a far better way to trade vs.
guessing)."

Jack Schwager and Larry Conners pretty much sum up my thoughts on
strategy trading.

In my previous articles, I have outlined what goes into
developing a system and how to approach finding the strategy that
fits you best. But once you find this system how do you evaluate
it? How do you know it is a profitable, stable, robust system?
That is the purpose of this article, to do an in-depth study of
Tradestation's Strategy Performance Report, the industry standard
for strategy testing.

The Performance Report I will be profiling here is for the ADX-20
system using the following criteria:

1. Trade 2 ES contracts.

2. Nothing added for slippage. I didn't add slippage for two
reasons:

a. First you are trading a very liquid market and in my
experience slippage is almost non-existent in the S&P e-
minis (please refer to step #1 in developing a system,
Market Action, in my first article
http://www.OptionInvestor.com/futurescorner/fc_062903_01.asp).

b. Second the system's Filter (please refer to step #3
Entering a position, in the above article) allows you time
to set up the trades with stops or limits.

3. I also have not allowed anything for commission because
commission rates are varied over brokerages and since the system
only trades 4+ times a month, commission should not be too much
of a factor.

4. The account size I started out with was $5000.00

The Tradestation Performance Report is divided into seven
sections; Performance Summary, Trade Analysis, Trades List,
Periodical Returns, Performance Graphs, Trade Graphs and
Settings. I will be reviewing the summary here and the rest of
the report in a later article.

The Performance Summary provides an overall view of the
strategy's performance, showing how well the strategy performed
when tested on historical data. It is divided into All Trades,
Long Trades, and Short Trades.

Here is most of the Performance Summary for the ADX-20 system.




While doing this analysis you will notice that we look at losses
differently from profits. Losses are viewed through a money
management filter where you don't have the same filter for
profits.

Total Net Profit  (Gross Profit - Gross Loss) is the most
important number in the report. If the strategy didn't make any
money then it doesn't matter what the rest of numbers are telling
you, you need not go any further. Since December 18 when this
system took its first trade and if traded every signal you would
have made $6050.00

Profit Factor (Gross Profit/Gross Loss) is the dollar amount the
strategy made for every dollar it lost. If the strategy's net
profit was 0 the profit factor would be 1. So we are looking for
numbers over 1 here.

Number of Trades, Winning Trades, Losing Trades and Even trades
numbers are fairly self explanatory.

Percent Profitable is the next most important number because like
I said in my last article you can have a positive Profit Factor
and still have the % Profitable less than 50. However, this means
you have more losers than winners but your winners have a larger
Average/Winning trade than the Average/Losing Trade. This would
be a very difficult strategy for me from the psychological point
of view. I don't know if I could stick with a strategy where I
lost more times than I won, no matter how much my winners made

Average Net Profit is the average amount you made on each trade
Net Profit/# of trades

Average Winning Trade is the average amount you made on each
winning trade Average Winning Trades/# of winning trades

Average Losing Trade is the average amount you lost on each
losing trade Average Losing Trades/# of losing trades

Largest Wining Trade is the most made on any one trade.

Largest Losing Trade is the most lost on any one trade. If this
number gives you heartburn or if this number is larger than your
money management plan permits this strategy is not for you.

Largest Winner as a % of Gross Profit tells you if one trade was
responsible for most of the profit. For example if the largest
winner was 50% of gross profit then you would know one single
trade made up most of the profit and the strategy is unstable.

Largest Loser as a % of Gross Loss tells you if one trade was
responsible for most of the losses, however, remember when I
stated earlier that profits and losses need to be looked at
differently? If the strategy had only had 2 losing trades then
this number of course would be large. The ADX-20 system's largest
loser was 58% of the gross loss but there were only 2 losers. In
comparison, if you only had two winners you would have never even
got to this point in your evaluation. In this case look at the
absolute number for Largest Losing Trade.

Trading Period shows the time frame from which the historical
data was pulled. I used the last seven months.

Percent of time in Market - shows the total time you have your
money at risk, the smaller this number the better. The ADX-20
system is in the market less than 1%.

Maximum Consecutive Winning Trades is the most winning trades you
had in a row.

Maximum Consecutive Losing Trades. If a strategy was profitable
but had 7 losers in a row, can you withstand this many losses and
not abandon the strategy? After the Profit Factor and the Percent
Profitable numbers this is next in importance. Knowing how many
losses in a row you may have to endure is a very important part
of trading.

Maximum Drawdown (intraday peak to valley) shows the amount of
money required to sustain the largest equity dip during the
period tested. With this system, you should consider whether you
would risk, or if you could afford, an equity deficit of as high
as $850.00 or more. While the future implementation of the
strategy may incur greater or lesser drawdowns, a Maximum
Intraday amount that is "acceptable" will always depend on your
risk aversion, financial limits and personality. Many times
traders will evaluate a strategy by looking at the largest losing
trade not realizing that somewhere along the way the system was
in a losing position much larger but then recovered. Can you
psychologically handle this number?

Maximum Trade Drawdown is the greatest realized loss experienced
from closed trades. It is the most money the system has lost over
the time frame identified. This system's Maximum Trade Drawdown
is $650.00

Well once again I have run out of space but still have so much
more to say but then don't I always? So I will review the rest of
the Performance Report in another article. I promise more very
interesting data is yet to come.

Remember plan your trade and trade your plan.

Jane Fox


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