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Daily Newsletter, Tuesday, 08/05/2003

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The Option Investor Newsletter                 Tuesday 08-05-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Close, Very Close
Futures Markets: The Airball Zone
Index Trader Wrap: See Note
Market Sentiment: Personal Indicators
Weekly Fund Screen: What Have You Done For Me Lately?


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      08-05-2003           High     Low     Volume Advance/Decline
DJIA     9036.32 -149.70  9187.73  9034.57 1.55 bln   1020/2197
NASDAQ   1673.50 - 40.60  1711.11  1671.04 1.72 bln   1086/2130
S&P 100   486.66 -  8.84   496.03   486.52   Totals   2806/4327
S&P 500   965.46 - 17.36   982.82   964.97
W5000    9306.25 -158.00  9464.20  9302.01
RUS 2000  457.45 -  7.32   464.77   457.08
DJ TRANS 2544.59 - 30.50  2577.53  2540.29
VIX        24.11 +  1.46    24.12    22.66
VXN        34.23 +  1.58    34.82    33.37
Total Volume 3,562M
Total UpVol    695M
Total DnVol  2,828M
52wk Highs  213
52wk Lows   110
TRIN       2.34
NAZTRIN    1.76
PUT/CALL   0.95
************************************************************

Close, Very Close

The markets ignored positive economic data and plunged to end
very close to major support levels. Bonds fell and yields rose
after a lackluster treasury auction and there are two more
days of auctions to come. Cisco disappoints after the close
and warns that while business is not getting worse it is also
not getting any better. Are we having fun yet?

Dow Chart


Nasdaq Chart


S&P Chart



The morning started out well with Chain Store Sales rebounding
from last weeks drop by +0.8%. Tax rebate checks are making it
to the stores and six southern states had tax holidays to boost
spending. The results were excellent and with school starting
early the shoppers were out in force. Considering average
selling prices have dropped -4% due to heavy discounting this
means sales were actually heavier than reported. Inventory is
being pushed out the doors and retailers are starting to
breathe easier.

Also beating estimates by a mile was the ISM Services Index
which soared to 65.1 when estimates were only 58. This was the
highest level since the index began and the biggest jump in
six years. This represents a 10-point increase in just two
months. New orders jumped to 66.9 from 57.5 but prices fell
to 50.6 from 51.4 and employment barely budged to 50.7 from
50.3. The services numbers are not normally market movers due
to the manufacturing ISM, which comes out a week earlier. The
numbers today were no different. We had a spike on the report
but that spike was quickly sold and we ended much lower.

The only negative report of the day came from the Challenger
Layoff report, which saw a spike in announced layoffs for July
to 85,117 from 59,720 in June. The two-month decline ended
with a steep jump. The continued need to cut costs to preserve
earnings and higher productivity is taking its toll. However,
the current level for all 2003 is 12% less than the same level
at this point in 2002. Analysts tried to spin it as positive
by pointing to the much higher levels earlier in the year when
layoffs averaged over 100,000. I agree it was higher but I
think the dip corresponds to the "expected" post war bounce
which did not really appear. If employers held off cutting
employees in case there was a bounce they could be feeling
the pain of higher payrolls now without higher profits.

Hurting the markets at the open was a strong warning by Costco
which said lower margins due to falling prices and higher costs
would depress earnings for the current quarter. They did say
sales were improving but had been below plan for the last two
months. The stock was knocked for a -6.90 loss to $30.06 and
represented investor feelings about companies unable to squeeze
any more earnings out of their turnip.

Last night the Semiconductor Billings report showed that they
rose +0.3% in June. April was revised down to 1% from 2%. The
analysts tried to spin this minor gain as positive, the fourth
consecutive month of gains, but they neglected to mention that
it was also the smallest gain for those same four months. Flash
memory chips continue to supply the gains. The SOX was not
impressed and closed with a -12 point drop to 383.

Also helping contribute to the market slide was the financial
sector which is getting killed on the bond action. The $BKX.x
has dropped from 903 to 856 in only 3 days. The rebound from
yesterday was almost completely retraced and we are nearing
two month lows. With nearly 50% of the S&P either techs (27%)
or financials (22%) it is not surprising that it closed at
two month lows as well. The 50 DMA at 986 is well above the
965 close. With the futures trading at 959 overnight it appears
the cash index will test the July intraday low at 962.10 at the
open.

After the close Cisco reported earnings that were inline with
estimates but they had to stretch to do it. Cisco reported that
they bought back 424 million shares, 83 million in the last
quarter, which reduced their shares outstanding by -3.7%. They
also said they had $5.2 billion left in the current buyback
program.  Without the share repurchase the EPS would have been
closer to +13 cents. There were several other warning signs.
Inventory rose to $873 million from $765 million. Gross margins
which had been expected to rise to 71% remained level at 70%
and Cisco said they would be dropping to 67-69% going forward.

Last quarter Cisco earned $982 million on revenue of $4.7
billion. In the same quarter last year Cisco earned $772
million on sales of $4.48 billion. There has been no top line
growth in a year and earnings have come primarily from cost
savings. Cisco said expenses could rise +2-3% in the current
quarter. That is a disguised way of saying that earnings may
fall over the next quarter. Sales declined over the prior
quarter by -2.6%. The company said it continued to see weak
demand and has yet to see a material increase in IT spending.
John Chambers tried to spin the results but analysts continue
to focus on terms like "continues to be a challenging
environment" and "Cisco will continue to curtail costs by
keeping a flat headcount." Analysts said that last statement
was an implied reduction in force due to attrition and other
factors. Cisco basically said on the conference call that
they do not see the business environment getting any worse but
they also do not see it getting any better. Cisco was trading
down -$1.30 in after hours. Cisco's cash flow, which Chambers
normally touts as a measure of true strength fell to $1.55
billion from $1.61 billion for the same quarter in 2002. Cash
on hand dropped nearly a billion dollars. Accounts receivable
rose to 26 days compared to 21 days in 2002 and 23 days last
quarter. Every item is just slightly worse than it was before.
Not bad, just slightly worse, but analysts feel that the
cracks in the armor are beginning to show.

The bond market took yet another hit today. The government
auctioned off $24 billion in three year notes at a yield of
2.422%. The bid-to-cover ratio, a measure of demand, came in
weaker than expected at 1.32 vs the 1.96 ratio of the last
sale in May. There will be another $18 billion of 5-year notes
on Wednesday and another $18 billion of 10-year notes on
Thursday. This is not good news for the bond market despite
the fact the auction was expected for weeks. Considering the
selling in the bond market over the last six weeks, the lack
of interest in government paper and the potential for several
hundred billion more over the next several months the outlook
for rates is not good. Once the auction was over the 10-year
yield soared to close near the high of the day at 4.44%.

The stock market is not happy about this complete retracement
of the Monday bond bounce. It appears it was an oversold
reaction to the 100-year storm as Franklin Raines, the FNM CEO,
called it. The rumors are still flying that a big bond house
is in trouble and part of the Monday bounce was relief that
there was no failure announcement over the weekend. With yields
soaring and the market dropping, anyone in trouble last week
is likely in worse trouble today. The remaining auctions this
week are expected to drive prices down and yields up even
further. The one-day reprieve for the homebuilders disappeared
as they returned to close near the lows for the week.

It was not a good day for the markets despite the good economic
news. The Dow closed at 9036, just slightly over the critical
9000 level and well under its 50 DMA at 9100. The Nasdaq closed
at 1673 and only +5 points over the 50 DMA at 1668. This was
the lowest close for the Nasdaq since July 3rd. The S&P took
the biggest hit with a close at 965 and well below its 50 DMA
at 986. Other than the psychological support at 950 the next
major support level would be the 200 DMA at 940. For the
broadest market view the Wilshire-5000 closed at 9306. The 9300
level on the $TMW.x is directly equivalent to Dow 9000 and it
was the lowest close for the Wilshire since early July.

Wilshire Chart



To put it bluntly, if the Dow closes under 9000, the Wilshire
under 9300 and the S&P under 960 then the trend is over. The
constant rally by the markets in the face of bad news appears
to be over. They cannot even rally them on good news this week.
The implications are serious. I said on Sunday I was long term
bullish and short term bearish. My short term was two weeks
and it appears to be acting as expected. I have running email
conversations with a great many traders and market analysts
and almost without exception they are expecting a short term
drop. That may be a strong contrarian indicator in itself. As
traders we should look at it as a long term buying opportunity
developing not the end of the world. This is just a normal
profit taking cycle and a normal first week of August. It is
accelerated by the bond fiasco. It is also accelerated by the
options expiration next week and the extreme bullish move
since March. Even rumors about Saddam failed to bounce the
market this week. If we break Dow 9000 then my July target
of 8500 still stands as a worst case scenario. If you are
short I would be looking at the 200 DMA at 8730 as decent
support and an initial exit. Plan accordingly.

If the army of short term bearish traders I communicate with
are a bullish contrarian indicator then I have the perfect
contrarian bearish indicator. Ralph Acompora said on TV tonight
that we are in a cyclical bull market that should last through
2004 and the Dow could make a new all time high. For those with
short memories the Dow's high was 11,750 in Jan-2000, roughly
+2750 points above our current level and a +30% increase from
here. I hope he is right but considering Cisco's earnings
tonight I just think it might take a little longer and start
from a little lower.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

The Airball Zone
Jonathan Levinson

A moderately bearish day for treasuries and equities degenerated
into a last-minute sell-a-thon in equities commencing after the
3PM EST close of the treasury market.  Less liquidity equaled
fewer bids, and the action of the tape reflected that.


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

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
ES03U      991    975    967    951    943
YM03U     8990   8961   8906   8877   8822
NQ03U     1216   1209   1195   1188   1174


10 minute chart of the US Dollar Index




The US Dollar Index got sold heavily at 10AM, on what I'm
guessing was the poor employment data from the Challenger Report.
The Fed's small 250M net addition with its 5.50B overnight repo
refunding 5.25B was too small to make any difference there.  The
equities selloff at the close took the US Dollar Index down with
it, below support to 95.95 as of this writing.


Daily chart of December gold




The pullback in the US Dollar Index brought it back to
yesterday's levels until the selling frenzy at the cash close,
and consequently the move in gold was unimpressive in either
direction, as the December contract posted an inside day on
volume of 243 contracts.  That said, the action was encouraging
for gold bulls, given the clear sell signals on the oscillators
and the proximity to the lower ascending support line.  In a
downphase, every positive day is a good day, and December gold
closed higher by 1.70 at 352.60.  The precious metals indices
were mixed, HUI closing +.05 at 165.26, XAU -.33 to 80.91.  The
CRB was modestly lower, dropping .70 to 234.83, with crude oil,
heating oil and lean hogs leading the advancers.  Gold was up
2.50 at 343.40 in the evening session as of this writing.

Daily chart of the ten year note yield




There was significant action in treasuries today.  Marketwatch
reported that the auction of 24B in 3 year treasury notes at
2.422% yield saw weaker than expected demand, with the bid to
cover ratio 1.32 compared with last May's 1.96.  Treasuries
opened stronger but sold off into the close, closing near their
highs of the day with the five year note yield closing up 14.5
basis points at 3.29%, the TNX up 12.1 bps to 4.441% and the TYX
up 9.5 bps to 5.383%.   Tomorrow we have 18B each of 5 year
notes, and another 18B of 10-year notes on Thursday to be
auctioned.  On the basis of our liquidity thesis, I expect these
auctions to drain the financial markets further, which should
continue to pressure bonds, commodities, and equities.
Furthermore, given the weaker-than-expected demand, the selloff
in bonds over the past weeks appears to have been timely-
imagine how much weaker demand would have been without the multi-
week rally in yields.

Daily NQ candles




Bonds sold off, and so did equities.  The NQ did what bears have
been waiting over four months to see- it broke down solidly below
its rising daily trendline, closing at the lows of the day on
heavy volume.  The selling aborted the tentative stochastic up-
phase and confirmed the Macd downphase, with the closing print
challenging the lower Bollinger band and the 50 day EMA.  I see
no fundamental reason for a bounce tomorrow other than the
Bollinger band violation, particularly given the liquidity drains
implied by the bond auctions scheduled for tomorrow and Thursday.

30 minute 20 day chart of the NQ




The breakdown would have been textbook except for the throw-over
yesterday back above the trendline.  The action of the past two
days was sufficient to bludgeon active traders, but the outcome
is clear enough, with the Nasdaq futures now below the rising
trendline, joining the ES.  That said, the selling frenzy sets
the NQ up for a technical bounce on the basis of the Bollinger
band violations and oversold short cycle oscillators.  This
bounce need not come at all, but traders need to be alert to the
possibility.  As the longer cycles on the daily chart continue
lower, those longer cycles can force the shorter cycles to trend
in oversold territory as the downphase plays out.

Daily ES candles




The S&P futures sunk decisively below support, and the S1 value
of 951 generated by the pivot calculator looks like a reasonable
support target to me, coinciding with Fibonacci support off the
rally high.  The cyclical picture on the ES is the same as that
on the NQ, except that it's weaker, as we've been seeing for
weeks.

20 day 30 minute chart of the ES




Once again, the ferocity of the selling sets us up for a
technical bounce, but only the intraday oscillators below are
actually oversold and trending.  Not even the 300 minute
stochastic above is indicating a bottom.  951 ES could do it for
the time being, however.

150-tick ES




This 150-tick view of the ES, along with my trendline assumptions
entered throughout the session, says it all.  What was a run-of-
the-mill tricky session turned into a rout.  Note the trending
oscillators.

Daily YM candles





The YM is set up the same as the NQ, posting its first decisive
trendline break since the spring rally began.

20 day 30 minute chart of the YM




There's really nothing to add.  We've been following the
overbought bullish percent indices, breadth and sentiment
indicators for months now.  The rampant bullishness that has
characterized this year's trading may be gearing up for its date
with gravity.  The tests of the S1 equity values will go a long
way to clarifying the mid-term picture.

In treasuries, the Fed's silence continues to shock me, as the
exact opposite scenario as that described as "desirable" by the
Chairman and Governor Bernanke continues to progress.  At what
point will the run in yields get arrested?

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_080503_1.asp


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

Personal Indicators
Jonathan Levinson

The spectacular sell off into the close following weeks of
seemingly endless range bound trading has toppled a number of
indicators and done severe technical damage to the charts.  It's
an excellent opportunity to reflect on our own reactions to the
tape and the effectiveness of our trades.

While each indicator provides an accurate snapshot of a different
facet of the market, and combinations thereof provide a broader-
but-still-partial picture of same, the live tape presents a
real-time challenge to traders.  The indicators dance and change
at often inconstant rates, leaving it up to traders to interpret
their messages and make often huge decisions on the fly.

The task is too complex for most traders to reduce to a
consistently reliable mechanical system, although many do.  For
this reason, the richest traders, institutions, rely increasingly
on robots to do their trading, seeking an edge in increasing
complexity.  For most of us, however, we operate live and rely on
"gut" feel and experience to guide our trades.  For this reason,
it is essential to be consistent, and to know when we're not "in
the zone."  The range bound trading of the past weeks has been
treacherous, with huge, sudden moves often separated by days of
slow, minute range bound action.  A steady, detached view of the
tape and its indicators is a prerequisite to consistent, safe
and successful trades, as is a rapid awareness of when one's not
in that state.

As we see what appears this afternoon from many indicators to be
the confirmation of a new downtrend, we should be attentive to
our own internal indicators.  It's likely that there will be
bigger swings and shorter-duration ranges as volatility climbs
and the bulls awaken from their pleasant reverie.


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

Market Averages

DJIA ($INDU)

52-week High:  9361
52-week Low :  7197
Current     :  9036

Moving Averages:
(Simple)

 10-dma: 9187
 50-dma: 9099
200-dma: 8537

S&P 500 ($SPX)

52-week High: 1015
52-week Low :  768
Current     :  965

Moving Averages:
(Simple)

 10-dma:  986
 50-dma:  986
200-dma:  911

Nasdaq-100 ($NDX)

52-week High: 1316
52-week Low :  795
Current     : 1229

Moving Averages:
(Simple)

 10-dma: 1265
 50-dma: 1238
200-dma: 1091


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


Is this it?  After months of floating aimlessly above the 20 level
are we finally seeing a move and some follow through in the VIX?
Traditionally drops toward the 20 level (and under) in the VIX signal
market tops.  The reversals aren't usually immediate and we've seen the
same here.  However, the sharp move higher in the value of the VIX
suggest that traders are more willing to pay higher premiums on put
options, which indicates a rise in fear.  A move over 25.00 could be
significant in that it would mark definite change in investor
psychology.

CBOE Market Volatility Index (VIX) = 24.11 +1.46
Nasdaq-100 Volatility Index  (VXN) = 34.23 +1.58


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.95        526,874       501,760
Equity Only    0.81        409,330       331,713
OEX            0.66         34,593        22,974
QQQ            1.65         44,430        73,175


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

Bullish Percent Data

           Current   Change   Status
NYSE          68.4    - 1     Bull Confirmed
NASDAQ-100    70.0    - 5     Bull Confirmed
Dow Indust.   80.0    + 5     Bull Correction
S&P 500       74.8    - 1     Bull Correction
S&P 100       81.0    - 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  1.22
10-Day Arms Index  1.13
21-Day Arms Index  1.05
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     847       999
Decliners    1971      2038

New Highs      45        79
New Lows       69        10

Up Volume    240M      389M
Down Vol.   1257M     1337M

Total Vol.  1518M     1736
M = millions


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

Commitments Of Traders Report: 07/29/03

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

Still looking at a lack of major change in the large S&P futures
contracts.  Commercial traders and small traders have yet to make
any big moves lately.


Commercials   Long      Short      Net     % Of OI
07/08/03      415,053   453,720   (38,667)   (4.5%)
07/15/03      414,020   453,033   (39,013)   (4.5%)
07/22/03      411,206   442,131   (30,925)   (3.6%)
07/29/03      405,429   445,114   (39,685)   (4.7%)

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
07/08/03      152,239    74,749    77,490    34.2%
07/15/03      148,716    70,279    78,437    35.8%
07/22/03      155,891    76,466    79,425    34.2%
07/29/03      155,216    73,030    82,186    36.0%

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

Quite the opposite of the large S&P futures above, we're seeing
some big differences in the e-mini positions.  Commercial traders
have turned very bullish while the small traders is increasing
their net bearish positions.  These are new milestones for both.


Commercials   Long      Short      Net     % Of OI
07/08/03      192,815   224,124    (31,309)  ( 7.5%)
07/15/03      214,274   218,765    ( 4,491)  ( 1.0%)
07/22/03      249,392   249,386          6     0.0%
07/29/03      272,659   216,166     56,493    11.6%

Most bearish reading of the year: (354,835)  - 06/17/03
Most bullish reading of the year:   56,493   - 07/29/03

Small Traders Long      Short      Net     % of OI
07/08/03       56,394    72,090   (15,696)  (12.2%)
07/15/03       45,372    54,654    (9,282)   (9.3%)
07/22/03       45,945    76,071   (30,126)  (24.7%)
07/29/03       44,437    93,144   (48,707)  (35.4%)

Most bearish reading of the year: (48,707)  - 07/29/03
Most bullish reading of the year: 449,310   - 06/10/03


NASDAQ-100

There is very little change in positions for either the
small trader or the commercials.

Commercials   Long      Short      Net     % of OI
07/08/03       30,489     48,311   (17,822) (22.6%)
07/15/03       28,467     49,154   (20,687) (26.7%)
07/22/03       32,502     48,139   (15,637) (19.4%)
07/29/03       31,456     50,294   (18,838) (23.0%)

Most bearish reading of the year: (20,687)  - 07/15/03
Most bullish reading of the year:   9,068   - 06/11/02

Small Traders  Long     Short      Net     % of OI
07/08/03       26,136     9,035    17,101    48.6%
07/15/03       26,489     8,004    18,485    53.6%
07/22/03       27,321     8,844    18,477    51.1%
07/29/03       25,691     7,810    17,881    53.4%

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

It's the same story here.  Maybe it's the summer doldrums
that's leaving the size of futures positions in a very sideways
trend.


Commercials   Long      Short      Net     % of OI
07/08/03       20,752    11,860    8,892      27.3%
07/15/03       21,607     7,855   13,752      46.7%
07/22/03       22,198     8,176   14,022      46.2%
07/29/03       23,696     9,572   14,124      42.5%

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
07/08/03        5,005     8,093   (3,088)   (23.6%)
07/15/03        5,475     9,717   (4,242)   (27.9%)
07/22/03        6,110    10,898   (4,788)   (28.2%)
07/29/03        5,744    11,601   (5,857)   (33.8%)

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

What Have You Done For Me Lately?

This week, we see which mutual funds have produced the highest
total returns for investors since mid-year in seven broad fund
types: S&P 500, growth, value, core, mixed, global, and sector.
Not all equity funds have been able to build on their superior
performances of the second quarter 2003, with the stock market
as measured by the S&P 500 index up less than one percent on a
quarter-to-date basis through August 4, 2003.

In each broad fund type, we'll give you our pick based on fund
returns, risks, expenses, management and other factors, giving
greater importance to each fund's long-term investment results.
We want funds that have performed well lately, but also have a
strong long-term record of performance relative to their peers.

To perform this exercise, we start with the Fund Finder tool at
www.nytimes.com (see Mutual Fund section).  We like the way the
fund universe is divided here, giving us the seven broad equity
fund types that we'll use in this week's fund screen.  Then, we
will take the fund symbols and load them into Morningstar.com's
Fund Compare tool online so we can compare and evaluate the top
performers in each fund category using current data and ratings.

Screening/Evaluation Process

The first thing we did was identify the highest performing funds
in each fund category.  For load funds, we used the fund's class
A shares, which come with front-end loads but tend to have lower
operating expenses.  Some of the fund symbols are "institutional"
class shares, so they may not be offered in the retail market or
the retail shares may have higher costs/expenses associated with
them.  We'll find out for sure when we load these symbols in the
Morningstar.com Fund Compare tool online.


  QTD Return %: S&P 500 Index Funds (Aug-04)
  + 1.1% Oppenheimer/Mercury Advisors S&P 500 Index Y (OSPYX)
  + 0.9% Delaware S&P 500 Index (DSPNX)
  + 0.8% Cigna S&P 500 Index Retail (CINRX)
  + 0.8% American AAdvantage S&P 500 Index (AAFPX)

  QTD Return %: Growth Funds (Aug-04)
  +16.5% Henlopen Fund (HENLX)
  +11.2% Oberweis Emerging Growth (OBEGX)
  +10.9% Kopp Emerging Growth A (KOPPX)
  +10.6% Oberweis Micro Cap (OBMCX)

  QTD Return %: Value Funds (Aug-04)
  +11.2% Davis Park Series/Ameristock Focused Value (AMFVX)
  +10.5% RBB Fund/Schneider Small Cap Value (SCMVX)
  + 9.0% Hotchkis & Wiley All Cap Value A (HWAAX)
  + 8.4% Advisor Series/Al Frank Fund (VALUX)

  QTD Return %: Core Funds (Aug-04)
  +10.9% Corbin Small-Cap Value (CORBX)
  +10.4% Pacific Advisors Small Cap A (PASMX)
  + 9.6% Reynolds Fund (REYFX)
  + 9.4% Bhirud/Apex Mid Cap Growth (BMCGX)

  QTD Return %: Mixed Funds (Aug-04)
  +14.3% ProFunds Rising Rates Opportunity Inv (RRPIX)
  +11.3% Rydex Juno Inv (RYJUX)
  +11.1% Ariston Convertible Securities (CNCVX)
  + 3.9% Oppenheimer Global Growth & Income A (OPGIX)

  QTD Return %: Global Funds (Aug-04)
  +14.0% Dreyfus Premier Greater China A ()
  +13.4% Eaton Vance Asian Small Companies A (EVASX)
  +13.0% Alliance Greater China 97 A (GCHAX)
  +11.9% Fidelity Korea T (FAKTX)

  QTD Return %: Sector Funds (Aug-04)
  +28.6% American Heritage (AHERX)
  +23.1% ProFunds Semiconductor UltraSector Inv (SMPIX)
  +16.8% Matthews Asian Technology (MATFX)
  +14.9% Firsthand Technology Value (TVFQX)


We then compared and contrasted the four funds in each fund type
using Morningstar.com's Fund Compare tool on the basis of return
and risk, portfolio characteristics and management, and expenses.
We employed Morningstar.com's Fund Score tool too to see how the
four funds scored on different selection criterion.  In the next
section, we tell you which fund we feel is your best bet in each
fund category.

Our Favorite Funds

Of the four funds in the S&P 500 Index Fund Group, Delaware 500
Index Fund is your best bet, but the ticker symbol displayed is
for the fund's institutional class shares, so it's not truly an
option.  While it is true that these four funds have beaten the
Vanguard 500 Index Fund (VFINX) and similar funds since June 30,
none are ahead of the Vanguard 500 Index Fund on a year-to-date
return basis through August 4, 2003.  So, in this group we make
an exception.  We think your best bet in this group remains the
Vanguard 500 Index Fund (VFINX), with its 1.49% yield and 0.18%
expense ratio.  The fund's 10-year average annual return (10.2%)
has beaten five out of six funds in the Morningstar large-blend
category.  It's a proven winner, appropriate as a "core" equity
investment.

All four funds in the Growth Fund Group are categorized in the
small-cap growth style box, per Morningstar, so they invest in
emerging growth companies in pursuit of maximum capital growth.
In this group, we think your best bet is Henlopen Fund (HENLX),
which has shown in the past as well as present that it can run
with the pack in up markets, capturing excess returns for risk-
tolerant investors.  The fund's trailing 4-week, 3-month, year-
to-date and 1-year returns through August 4 rank in the top 10%
of the Morningstar small-growth category as does its long-term
returns.  For the trailing 10-year period through July 31, the
Henlopen Fund has produced an annualized total return of 14.0%,
ranking in the category's top 7 percent.  If you can tolerate a
higher level of risk, Henlopen makes for a fine supporting-role
player.

In the Value Fund Group, we like Hotchkis & Wiley All Cap Value
Fund Class A (HWAAX) a multi-cap value fund that has gotten off
to great start.  Hotchkis & Wiley is a leading value investment
manager whose domestic equity strategies are best characterized
as "bottom-up" and emphasizing financial strength, high current
yields and low price-to-earnings ratios.  While this fund has a
brief investment history, the firm has built a solid reputation
over time.  Since the fund's inception on December 31, 2003, it
has increased in value by 36.5%, including a 28.5% return in Q2
and a quarter-to-date return through August 4 of 8.95% (say 9%).

Your best bet in the Core Fund Group might be the Reynolds Fund
(REYFX) but only if you are making a pure up-market play.  This
fund's aggressive multi-cap core style can produce greater than
average returns in up markets, but can also produce higher than
average losses in down markets.  The fund's trailing return for
the 3-month period (31.5%), year-to-date period (67.4%) and one-
year period (52.1%) all rank in the top 1% of the "large-growth"
category, per Morningstar.  Lipper calls Reynolds Fund a multi-
cap core stock fund.  Since June 30, the fund is up 9.6 percent.

ProFunds Rising Rates Opportunity Fund Inv (RRPIX) could be your
best bet in the Mixed Fund Group.   The flexible portfolio seeks
investment results that correspond to 125% of the inverse of the
daily price movement of the most recently issued 30-year Treasury
Bond.  If you believe the economy will be expanding from here and
interest rates will therefore, be rising, this fund may be a wise
investment for the next 3-5 years.  If your bond fund investments
are of the intermediate-term or long-term variety, you can use it
as a hedge against rising interest rates, since gains on the fund
will offset losses on your other holdings, should rates increase.
Since June 30, 2003, ProFunds Rising Rates Opportunity Fund is up
an equity-style 14.3 percent.

In the Global Fund Group, your best bet may be Eaton Vance Asian
Small Companies Fund A (EVASX) which invests assets in different
countries in the Pacific region, rather than invest primarily in
a single country such as China or Korea.  However, the fund does
invest primarily in small company stocks, so it's appropriate as
supporting role player.  Since 2001, the fund has been producing
strong relative returns for pacific region investors, ranking in
the top quintile of the Morningstar Pacific/Asia Stock ex. Japan
category.  On a quarter-to-date basis through August 4, 2003, it
has produced a 13.3% total return for investors, while providing
some decent diversification against a U.S. equity portfolio.

In the last group, the Sector Fund Group, we favor the Firsthand
Funds Technology Value Fund (TVFQX) for its value-based approach
to technology investing.  It invests primarily in common stocks
of companies in the "electronic" and "medical technology" fields
which the Silicon-Valley firm believes to be undervalued and have
potential for capital appreciation.  This fund may be appropriate
for tech bargain hunters with high tolerance for risk/volatility.
Since June 30, the fund has risen 14.9 percent as tech investors
look for values in the beaten-down sector.

Conclusion

This week, we profiled funds that have led their respective fund
types on a quarter-to-date return basis through August 4, and we
like now for various reasons.  Just like athletes, investors are
often looking at what funds have done for them lately.  With the
strong returns of the second quarter, many mutual fund investors
are expecting big returns again in the third quarter.  The funds
we identified this week are building on their superior return in
the second quarter.  They may be ones to watch in Q3.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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The Option Investor Newsletter                  Tuesday 08-05-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: AZO, FDX, GDW
Dropped Puts: None
Call Play Updates: KSS, LLL, PCAR
New Calls Plays: None
Put Play Updates: ATH, BDK, FITB, FRE, HD, MRK, PGR
New Put Plays: BBY, IBM


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

AutoZone, Inc. - AZO - close: 80.03 change: -2.11 stop: 80.50

The verdict is in and AZO's breakout over the $80 level appears
to have failed.  After several failed attempts to reach the $85
level last week, the stock began to weaken on what initially
appeared to be simple profit taking.  Yesterday's rebound from
the 10-dma looked like it might hold, but that possibility was
negated with the sharp drop through that average this morning and
it only got worse from there.  AZO is resting precariously above
its 20-dma ($79.92) and its 50-dma ($79.58), but that looks like
weak support at best.  Our stop was violated in the late
afternoon and that closes the play for a fractional loss.  With
broad market sentiment turning decidedly more bearish, we'll
chalk this one up as a failure and make room for fresh
candidates.

Picked on July 27th at    $80.17
Change since picked:       -0.14
Earnings Date           09/26/03 (unconfirmed)
Average Daily Volume =  1.29 mln


---

Fedex Corp - FDX - close: 64.01 change: -0.69 stop: 62.99

We're choosing to close FDX early for a couple of reasons.
Number one, the performance in the Dow Jones Transportation
average is anything but bullish.  The $TRAN lost another 1.21%
today and closed below what should have been support at 2550
after failing below support of 2600 just a few sessions ago.  The
MACD on the $TRAN just produced a new bearish sell signal from an
overbought condition.  Thus, with the $TRAN as the backdrop our
observation of a steady trend of lower highs in shares of FDX is
not encouraging.  The company's freight manager did come out with
some positive comments today saying FDX's freight division should
see growing revenues but the growth would be slower.  Those
traders not willing to call it quits just yet might want to
consider inching up their stop loss under the simple 50-dma
currently near $63.50.  P&F chart fans will note that FDX has not
yet violated its current triple-top buy signal.

Picked on July 20 at $65.32
Change since picked:  -1.31
Earnings Date      09/23/03 (unconfirmed)
Average Daily Volume:  1.70 million
Chart =


---

Golden West Fincl. - GDW - cls: 82.25 chg: -0.95 stop: 81.60

This could be trouble.  The deterioration in the banking indices
(BKX & BIX) could spell bad news for the broader markets.  It was
the financial sector that helped lead everyone higher and the
recent technical breakdown has been confirmed with additional
selling today.  Our call play on GDW has not yet been stopped out
but we don't feel like waiting around for a retest of $80.00 to
tell us what we already know.  Investors are taking profits and
support at the 50-dma is being broken left and right across
different sectors.  GDW's simple 50-dma is currently at $81.75
but we're going to exit now and cut our losses early.  P&F chart
readers will note that GDW's bullish triangle breakout has now
rolled over into a three-box reversal.

Picked on July 27 at $85.66
Change since picked:  -3.41
Earnings Date      07/21/03 (confirmed)
Average Daily Volume:  581  thousand
Chart =



PUTS:
*****

None


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

Kohl's Corporation - KSS - close: 58.80 change: -1.37 stop: 57.25

After 3 failed attempts to break through resistance, KSS finally
succumbed to the bears' assault on Tuesday, sliding back under
$59.  Price weakness continued down to just above $58 before the
stock caught a rebound from the 10-dma ($58.32).  Unfortunately,
KSS couldn't make much headway after that rebound with both the
broad market and the Retail index (RLX.X) breaking down.  The
action in the RLX was particularly bearish, as it continued its
breakdown from the rising channel and closed under the 50-dma
($329.77) for the first time since March 13th.  This is precisely
why we initiated coverage of KSS with a trigger just over the
recent highs.  We're still waiting for that trigger ($60.60) to
be hit, so if the stock succumbs to the weakness all around it
then there's no harm done.  But if it can break out despite all
the bearish influences, then it will confirm the relative
strength we've been focused on.  If our $57.25 stop is hit, then
we'll be dropping the play anyways.  Wait for the breakout!

Picked on July 31st at    $59.35
Change since picked:       -0.55
Earnings Date           08/14/03 (unconfirmed)
Average Daily Volume =  4.57 mln


---

L-3 Communications -LLL - close: 48.02 change: -1.57 stop: 47.25

That doesn't look good at all!  After more than a week of failing
to break out over the $50 resistance level, shares of LLL got hit
with a serious bout of selling on Tuesday, knocking the stock
right back to the top of its July 28th gap.  Adding to the
bearish tone, the stock ended at its low of the day, breaking the
10-dma ($48.45) in the process and looks like it will break into
that gap tomorrow.  The Defense index (DFI.X) got hit for nearly
a 2% loss on the day as well, breaking its 20-dma ($559) and
closing at the low of the day.  Clearly, this is not the setup we
want to see and we are not recommending new entries at this time.
Aggressive traders can consider entering on a solid rebound, but
will want to see LLL back over its 10-dma and the DFI index back
over the 20-dma before doing so.  The best approach for new
entries is still to wait for LLL to finally break out with a
trade over $50.50, but tonight such a setup looks far away.  If
our stop at $47.25 (just below the bottom of the gap) is taken
out, then we'll know for certain that we chose poorly.

Picked on August 3rd at    $49.90
Change since picked:        -1.88
Earnings Date            10/22/03 (unconfirmed)
Average Daily Volume =      962 K


---

PACCAR - PCAR - close: 77.18 change: -1.17 stop: 72.99

Shares of PCAR may not have stood out among the declining stocks
today (there were so many) but its relative strength over the
last several sessions should have.  The stock rallied up to the
$79.73 level on Monday before pulling back.  Today's profit
taking of 1.5% is mild.  We knew that the $80 mark could be
resistance so the price action is not unexpected.  Traders can
use the current weakness to their advantage.  Look for a pull
back to support between $74.00 and $75.00.  A bounce in this
region would be an attractive entry point for PCAR's next leg
higher.  Speaking of which Prudential just raised their price
target on PCAR today from $72 to $87 on strong data indicating
improvement in the truck market.

Picked on July 31 at $77.24
Change since picked:  -0.06
Earnings Date      07/24/03 (confirmed)
Average Daily Volume:  1.15 million
Chart =



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

None


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

Anthem Inc. - ATH - close: 72.26 chg: -1.99 stop: 75.50 *new*

Our new put play from Sunday is off to a good start this week.
Shares dipped towards their simple 100-dma on Monday before
rebounding back from its lows with the rest of the market.
Unfortunately for shareholders the stock turned around again
Tuesday morning producing a fresh failed rally under the $75.00
level and confirming the technical break of support at $75.00.
As we mentioned earlier our first target is $70.00 but some
indicators suggest a potential move to the $67.50 level near its
simple 200-dma.  We are lowering our stop to $75.50.

Picked on August 3rd at $74.49
Change since picked:     -2.23
Earnings Date         07/31/03 (confirmed)
Average Daily Volume:      1.1  million
Chart =


---

Black & Decker - BDK - cls: 38.46 chg: -1.04 stop: 41.01 *new*

And it's off to the races for the bears in BDK.  Shares have been
cascading lower on strong volume lending some conviction to the
move.  OptionInvestor.com was triggered short when BDK traded at
$39.99 on Monday but more aggressive traders who took our
alternative entry at a failed rally of $41.00 are looking pretty
good today.  While we are very encouraged by the follow through
on the technical breakdown the stock is now somewhat overdue for
a bounce and the $38.00 level is a logical place to expect one.
We're not necessarily against adding new positions at current
levels but we wouldn't mind waiting for a bounce and a new failed
rally (maybe near the $40 mark) either.  The move under $40 is a
major break in support on both BDK's daily and weekly charts.
Remember our profit target is the $35.00 level but don't let that
stop you from harvesting profits should you feel the urge.  We're
lowering our stop loss to $41.01 but tighter stops near $40 would
work as well.

Picked on August 4 at $39.99
Change since picked:   -1.53
Earnings Date       07/24/03 (confirmed)
Average Daily Volume:   731  thousand
Chart =


---

Fifth Third Bancorp - FITB - cls: 52.77 chg: -1.19 stop: 55.01 *new*

So far so good.  Our bearish play in shares of FITB was a little
slow off the start but it's finally working out.  FITB has been
under performing its peers for weeks now and when the banking
indices started to crack on Friday we saw similar cracks in FITB.
Now that support has been broken we can start to plan our exit
strategy.  Originally we pointed to the $51.00-$50.00 area as our
profit target.  The $50 level is strong psychological support as
well as historical support/resistance.  However, FITB's P&F chart
shows rising support at $51.00.  We're not quite sure where we
want to exit just yet and might ponder exiting half near $51.00
and the other half (of our hypothetical position) near $50.00.
Let's call it $51.25 and $50.25 just for kicks and to get the
jump on other traders looking at the same levels.  We are going
to lower our stop loss to $55.01 but $54.40 might work out as
well.

Picked on July 17th at $55.26
Change since picked:    -2.49
Earnings Date        07/15/03 (confirmed)
Average Daily Volume =    2.4 million
Chart link:


---

Freddie Mac - FRE - close: 48.75 change: +0.45 stop: 50.25

We've been expecting a decent oversold bounce from FRE ever since
the stock solidly broke below the $50 level last week.  That
seems to have been what transpired on Tuesday, as the stock
managed to eke out a 45 cent gain while the rest of the market
got pummeled under significant support levels.  This rebound does
nothing to change our outlook though, as FRE remains well below
its 10-dma ($49.59), which has been acting as consistent
resistance for the past 3 weeks.  Aggressive traders can consider
new entries on a rejection from below the 10-dma, looking for the
stock to finally break $48 and make strides towards our eventual
target of $45.  The one note of caution comes from the daily
Stochastics and MACD oscillators, which appear to be trying to
put in a bottom.  The more conservative approach for new entries
may be to wait for a break below $47.75 (just below yesterday's
intraday low) before playing.

Picked on July 22nd at    $50.33
Change since picked:       -1.58
Earnings Date           07/15/03 (confirmed)
Average Daily Volume =  7.43 mln


---

The Home Depot - HD - close: 30.30 change: -0.65 stop: 31.35*new*

In a market filled with irrational and reactive spikes and
plunges, our HD play has been the paragon of consistency.
Posting a consistent series of lower highs and lower lows over
the past few weeks, the stock is very near our initial target of
$30.  As mentioned on Monday in the Market Monitor, conservative
traders should be taking advantage of the current weakness to
lock in gains in anticipation of a near-term bounce.  Of course,
an argument can be made that yesterday's rebound off the lows was
that rebound, but we're not sure.  You'll never go broke
harvesting gains.  We're still looking for HD to drop into and
fill its mid-May gap down to the $28 level, but it may not happen
until after a stronger oversold bounce than what we saw
yesterday.  Because of the risk of a bounce, we aren't
recommending new entries at current levels.  We'll continue to
ratchet our stop down, keeping it just above the 10-dma ($31.35),
which has continued to provide firm resistance during this
downward move.  Lower stops to $31.35 tonight.

Picked on July 10th at   $32.43
Change since picked:      -2.13
Earnings Date          08/19/03 (unconfirmed)
Average Daily Volume =  9.67 mln


---

Merck & Co. - MRK - close: 53.51 change: -0.62 stop: 55.75*new*

News this morning that MRK would be spinning off its Medco unit
in a tax-free dividend to shareholders on August 19th gave the
stock a bit of a boost this morning, but broken support turned
out to be strong resistance.  After failing to reach the $55
level the stock began to weaken in the early afternoon and picked
up speed into the close, ending at a new multi-month low of
$53.51.  That failed rebound may be the best entry point we see
for awhile, as the stock finally closed below the 38% retracement
($53.88) of the rally off the July-2002 lows and the 50%
retracement ($50.95) appears to be the next target for the bears.
Successive failed bounces below $55 still look attractive for new
entries, while momentum traders should be able to take advantage
of a breakdown under $53.25 (yesterday's intraday low) as an
entry point.  Our target remains the $50-51 area, with support
likely to come from that 50% retracement, which is just above the
bottom put in during March.  Lower stops to $55.75 (just above
the 10-dma).

Picked on July 29th at    $55.39
Change since picked:       -1.88
Earnings Date           10/20/03 (unconfirmed)
Average Daily Volume =  6.34 mln


---

Progressive Corp - PGR - close: 64.56 chg: -0.64 stop: 67.26

Is this it?  Have we finally witnessed the break in support for
shares of PGR?  The last two and half weeks have been frustrating
for bears as the stock would not close below support of $65.00.
However, we suspected the breakdown was imminent as the trend of
lower highs continued to press down on buyers chewing up demand.
We did get some help in the IUX insurance index which spent the
last few sessions completing its rollover from the 281-282 level
and dropped to support and its 50-dma near 270.  Further weakness
from here in the IUX could have the index retesting the 260 mark
for support.  Looking back to PGR, this has been the move we've
been waiting for.  Conservative traders, momentum traders,
patient traders who didn't jump in today can begin to evaluate
their entries.  Our first target is the $60.00 level near its
200-dma.  Feel free to tighten your stop should you feel the
need.

Picked on July 23 at $65.22
Change since picked:  -0.66
Earnings Date      07/16/03 (confirmed)
Average Daily Volume:  941  thousand
Chart =



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

Best Buy Company - BBY - close: 40.18 change: -1.83 stop: 43.05

Company Description:
Best Buy a specialty retailer of name-brand consumer electronics,
home office equipment, entertainment software and appliances.
The company provides a broad selection of models within each
product line in order to provide the customer with a meaningful
assortment, offering more than 5800 products, not counting
entertainment software titles.  Growing its store count by 15% in
fiscal year 2000, brought the grand total to more than 4000 in 41
states by year end.

Why we like it:
Throughout its rally off the March lows, the Retail index (RLX.X)
has been powered higher by strong stocks like BBY.  But over the
past few weeks, that strength has been fading, with the first
clue being the RLX breaking below the bottom of its 4-month
ascending channel last Friday.  Monday's trade saw more weakness
followed by an encouraging rebound from the 50-dma ($329.77), but
any enthusiasm behind that rebound quickly faded on Tuesday, as
the RLX logged a 1.94% loss and closed below the 50-dma for the
first time since early March.  The picture is much the same for
shares of BBY, as the stock had managed to rally above strong
resistance at $45 in early July, but that bullishness has been
steadily fading in recent weeks.  After rebounding from critical
support near $41 twice in the past couple weeks, the stock was
sold hard on Tuesday, breaking that support, and solidifying the
breakdown under the 50-dma (currently $42.85).  While there is
some mild support at $40, the next serious support appears near
$37.00-37.50, which was resistance in mid-May.  Even that support
should fail though if the breakdown in the RLX continues and BBY
continues to see increasing selling volume like that seen over
the past week.

There are a couple ways to play this one.  Momentum traders can
take advantage of a break below $40 to jump into the play, while
more conservative traders can look for a rebound from that level,
ideally setting up an entry on a rollover below $42, which should
be strong resistance now.  Once below $40, our initial target
will be for a drop to $37, at which point conservative traders
will want to harvest partial gains in anticipation of an oversold
rebound.  So long as that rebound fails below $40, we can use the
subsequent rollover to enter for the next leg of the decline down
to our final destination of $35.  Our stop will initially be set
at $43.05, which is just above the 50-dma, as well as yesterday's
intraday high.  Monitor the RLX index for confirmation of
continued weakness before playing.

Suggested Options:
Aggressive short-term traders will want to focus on the August 40
Put, as it will provide the best return for a short-term play.
With August contracts expiring next week though, conservative
traders will want to utilize the September 40 contract, which
provides greater insulation from the spectre of time decay.

BUY PUT AUG-40 BBY-TH OI=2962 at $1.25 SL=0.60
BUY PUT SEP-40 BBY-UH OI=4927 at $3.00 SL=1.50
BUY PUT SEP-37 BBY-UU OI=5783 at $1.85 SL=0.90

Annotated Chart of BBY:



Picked on July 10th at   $40.18
Change since picked:      +0.00
Earnings Date          09/17/03 (unconfirmed)
Average Daily Volume =  9.61 mln 


---

Intl Business Mach - IBM - cls: 79.85 chg: -1.28 stop: 82.51

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

Why We Like It:
Go with the flow.  That's our motto today.  If the Industrials
are going to give up 150 points and the tech sector is going to
be targeted for additional profit taking then we'll pick a stock
bound to be affected by both.  IBM certainly qualifies.  Shares
of the stock lost another 1.57 percent in today's session but
that by itself is not noteworthy.  No. We've had Big Blue on our
watch list and radar screens for a couple of weeks looking to see
if support at the $80 mark would hold.  Given the markets late
afternoon push lower the answer would be no.  Furthermore not
only did IBM break the $80 level of support but the last three
weeks have been a series of lower highs as investors sold at key
inflection points forming new resistance along the way down
($84.00, $82.50, $81.00, and its 200-dma all look like short-term
overhead resistance).

So what's wrong with Big Blue?  In reality it may not be IBM
itself.  That's not to say investors are happy with it.  Earnings
came out in mid-July and the company only reported in-line.
There was no upside surprise, no big positive spin about future
quarters.  Wall Street did seem impressed that IBM was able to
beat analysts' expectations on the quarterly revenue numbers but
certain divisions in the company seemed to stumble.  IBM even
added that it continued to see customers delay orders in Q2.
Investors could be painting IBM with the same broad strokes
affecting the tech sectors.  The NASDAQ lost more than two
percent today and closed below the 1700 level of support.  Closer
to home the GHA hardware index dropped almost 3.25 percent and
traded down towards the 200 level.

Most indicators would suggest that IBM has more weakness ahead of
it.  Daily and weekly chart oscillators are all bearish, albeit
some are pinned in oversold territory.  The stock's point-and-
figure chart, a sign of supply and demand, has tested and broken
key bullish support.  While there does appear to be some
potential support near $78.00 we're betting that IBM can trade
towards the $75.00 level.  We're going to initiate the play with
a stop loss at $82.51, which is above the 200-dma.


Suggested Options:
Our preference will be for the September and October puts.  The
80 and 75 strikes look like a good bet.

BUY PUT SEP 80 IBM-UP OI= 5786 at $3.00 SL=1.65
BUY PUT SEP 75 IBM-UO OI= 5619 at $1.20 SL=0.65
BUY PUT OCT 80 IBM-VP OI=23302 at $4.10 SL=2.00
BUY PUT OCT 75 IBM-VO OI=15264 at $2.25 SL=1.15

Annotated Chart of IBM




Picked on August 5 at $79.85
Change since picked:   -0.00
Earnings Date       07/16/03 (confirmed)
Average Daily Volume:   8.2  million
Chart =



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The Option Investor Newsletter                  Tuesday 08-05-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: Go With The Flow (IBM)

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

Intl Business Mach - IBM - cls: 79.85 chg: -1.28 stop: 82.51

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

Why We Like It:
Go with the flow.  That's our motto today.  If the Industrials
are going to give up 150 points and the tech sector is going to
be targeted for additional profit taking then we'll pick a stock
bound to be affected by both.  IBM certainly qualifies.  Shares
of the stock lost another 1.57 percent in today's session but
that by itself is not noteworthy.  No. We've had Big Blue on our
watch list and radar screens for a couple of weeks looking to see
if support at the $80 mark would hold.  Given the markets late
afternoon push lower the answer would be no.  Furthermore not
only did IBM break the $80 level of support but the last three
weeks have been a series of lower highs as investors sold at key
inflection points forming new resistance along the way down
($84.00, $82.50, $81.00, and its 200-dma all look like short-term
overhead resistance).

So what's wrong with Big Blue?  In reality it may not be IBM
itself.  That's not to say investors are happy with it.  Earnings
came out in mid-July and the company only reported in-line.
There was no upside surprise, no big positive spin about future
quarters.  Wall Street did seem impressed that IBM was able to
beat analysts' expectations on the quarterly revenue numbers but
certain divisions in the company seemed to stumble.  IBM even
added that it continued to see customers delay orders in Q2.
Investors could be painting IBM with the same broad strokes
affecting the tech sectors.  The NASDAQ lost more than two
percent today and closed below the 1700 level of support.  Closer
to home the GHA hardware index dropped almost 3.25 percent and
traded down towards the 200 level.

Most indicators would suggest that IBM has more weakness ahead of
it.  Daily and weekly chart oscillators are all bearish, albeit
some are pinned in oversold territory.  The stock's point-and-
figure chart, a sign of supply and demand, has tested and broken
key bullish support.  While there does appear to be some
potential support near $78.00 we're betting that IBM can trade
towards the $75.00 level.  We're going to initiate the play with
a stop loss at $82.51, which is above the 200-dma.


Suggested Options:
Our preference will be for the September and October puts.  The
80 and 75 strikes look like a good bet.

BUY PUT SEP 80 IBM-UP OI= 5786 at $3.00 SL=1.65
BUY PUT SEP 75 IBM-UO OI= 5619 at $1.20 SL=0.65
BUY PUT OCT 80 IBM-VP OI=23302 at $4.10 SL=2.00
BUY PUT OCT 75 IBM-VO OI=15264 at $2.25 SL=1.15

Annotated Chart of IBM




Picked on August 5 at $79.85
Change since picked:   -0.00
Earnings Date       07/16/03 (confirmed)
Average Daily Volume:   8.2  million
Chart =



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**********

Please read our disclaimer at:



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

For more information on advertising in OptionInvestor Newsletter,
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Contact Support

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