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Daily Newsletter, Monday, 08/11/2003

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The Option Investor Newsletter                   Monday 08-11-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Dog Days
Futures Wrap: Shark-Infested Market
Index Trader Wrap: Expect modest tone from FOMC
Weekly Fund Wrap: Stock Funds End Week Lower, Bond Funds Gain
Futures Corner: A Review of The Use of Market Breadth


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     08-11-2003         High     Low     Volume Advance/Decline
DJIA     9217.35 + 26.26  9251.59  9146.62 1.20 bln   1700/1082
NASDAQ   1661.51 + 17.48  1668.06  1646.59 1.19 bln   1927/1139
S&P 100   495.12 +  1.32   497.66   491.93   Totals   3627/2221
S&P 500   980.59 +  3.00   985.46   974.21
RUS 2000  459.27 +  5.33   459.27   453.94
DJ TRANS 2579.03 +  6.79  2597.80  2570.74
VIX        21.42 +  0.13    22.43    21.16
VXN        32.12 +  0.09    33.50    31.36
TRIN          0.62
PUT/CALL      0.93
*******************************************************************

Dog Days
by James Brown

Wall Street finds itself smack dab in the middle of the Dog Days
of Summer and we witnessed the lowest volume day of the year.  Of
course the FOMC meeting tomorrow may have something to do with
the low volume today but we'll get to that in a moment.  The
Industrials squeaked out another 26 point gain to make the
current rally stretch to four days in a row. Much of the
afternoon bounce in the $INDU was probably owed to 3M's
announcement to split its stock in September.  Meanwhile last
week's losers were this week's gainers as the tech sector was
generally green today.  All the major tech averages including the
DDX disk drive index, the GHA hardware index, the GSO software
index, the INX Internet index, the NWX networking index and the
SOX semiconductor index all turned in positive sessions.  Leading
the way were the storage and chip stocks.

Lending their efforts to help boost the U.S. markets were
generally positive world indices.  Japan begins a traditional
weeklong holiday today but that didn't stop the NIKKEI index from
adding 1.72% or +160 points to close at 9487.  Plus the Hang Seng
index rallied 1.49% or +148 points to break back above the 10,000
mark to 10,093.  European markets were mostly positive but the
gains were rather muted probably an extension of the range
trading here domestically before the FOMC meeting tomorrow.

Not helping stocks was another drop in the bond market, which
drove yields higher again with the 10-year note yielding 4.371%
and the 30-year yielding 5.296%.  Market internals were actually
much more positive than the closing numbers may lead you to
believe.  On the NYSE advancers beat decliners 17 to 10 and on
the NASDAQ gainers trumped losers 19 to 11.  Up volume beat down
volume by a margin of 2-to-1 on the NYSE and by nearly 4-to-1 on
the NASDAQ.   Despite it all the Dow Industrials remain below
overhead resistance at 9300 and the NASDAQ Composite, which
appeared to snap a losing streak, is still below the 1675 and the
1700 levels (not to mention its simple 50-dma).

Chart of the Dow Jones Industrials:




Chart of the NASDAQ Composite:




Most of the newsworthy stocks making headlines today were in the
technology sector but stealing the show was conglomerate 3M
(NYSE:MMM).  Shares of MMM spiked higher with a late afternoon
push after the company announced a 2-for-1 stock split.  This is
the first stock split in nine years for the highest dollar stock
in the Dow Industrials.  MMM last split 2-for-1 in April of 1994.
MMM's strong $1.95 gain on the day was crucial to the Dow's 26-
point gain on the session.  MMM burst out of a short-term bull
flag consolidation pattern and looks ready to breakout above
current resistance at $142.  Shares are currently overbought but
with any shorts still in this high flyer probably looking for the
exits it could get even more overbought.  The split will take
place on September 29th for shareholders on record as of
September 22nd.

Giving the software sector a boost today was an upgrade for
Oracle (NASDAQ:ORCL) from Merrill Lynch.  MER's analyst lifted
ORCL from a "neutral" to a "buy" citing limited downside risk and
plenty of benefit should the economy continue its gradual
recovery.  Looking at the chart of ORCL it may take some faith to
invest new capital as shares have fallen from $14 in mid-June to
just above $11 late last week.  Of course the timing of the
upgrade may not be that bad given the stock was near serious
support.  Shares bounced more than three percent today but still
closed under its simple 200-dma.

Believe it or not we still have corporate earnings to contend
with.  While we may miss the "Dude, you're getting a Dell!"
commercials we don't want to miss DELL's earnings report.  The PC
giant will be announcing earnings after the bell on Thursday.
What they have to say about end-user demand, especially during
this back to school period, will help set the stage for any
future technology moves throughout the third quarter.  Current
DELL estimates are for 24 cents a share.  Additional tech
earnings to watch this week are Applied Materials (AMAT) and
Maxim Integrated (MXIM) who both announce tomorrow.

This is also a heavy week for retail business earnings
announcements.  The S&P Retail index (RLX) is currently near 52-
week highs.  The RLX appears to have broken out of a bull flag
consolidation pattern but any follow through on the move will
depend on corporate results.  Tomorrow is a busy day with
earnings from May Department stores (MAY), Abercrombie & Fitch
(ANF), J.C.Penney (JCP), T.J.Maxx (TJX) and OfficeMax (OMX).  The
headline announcement to watch will be Wal-Mart's (WMT), which
comes out on Wednesday.  WMT announced today that they appeared
to be "on track" to meet its August same-store sales growth.  The
news helped spike shares of WMT up to a new 52-week high early in
the session before its gains faded into the close.  Also
announcing on Wednesday will be Ann Taylor (ANN) and Federated
Dept Stores (FD).

The biggest event this week also hits tomorrow and that is the
FOMC meeting.  Everyone expects the Fed to leave interest rates
unchanged at 1%, a 45-year low.  A surprise cut could be seen
rather poorly.  Everyone would wonder what the Fed saw that
scared them enough to cut rates again.  The real focus will be on
what the Fed has to say about current conditions and where they
see the economy headed.  The challenge here is that productivity
was very high in the second quarter.  Strong productivity gains
coupled with low utilization capacity does not create a need for
businesses to hire new staff.  Everyone knows that as we approach
this coming election year the number one topic will become job
growth.  We'll probably hear more comments about how the Fed is
ready to be accommodative and their biggest concerns are
inflation falling too low.  The good news is that we probably
have yet to see the bulk of any impact from those child tax
credit (refunds) hitting the economy.  Although the early signs
point to families spending those checks at stores like Wal-Mart,
which should be good news for the retail earnings announcements
this week.

As traders our concern could be another "sell the news" event
with the FOMC even though there doesn't appear to be any news to
sell just yet.  Thus far the traditional late-July to early
October market sell-off has not yet occurred.  We could be seeing
some signs of it in the NASDAQ but investors don't seem worried
yet, at least not from what the VIX and VXN are telling us.  As
Jim pointed out on Sunday, the longer we can trade sideways the
better chance we have of building a new base before what is
expected to be a ramp up into the fourth quarter.  Unfortunately,
we're starting to hear more "professionals" calling for a
retracement of one third to one half of the March to June gains.
Should the Dow/NASDAQ/SPX really breakdown then traders will need
to be ready to switch to bearish strategies.

Watch those stop losses.

James


************
FUTURES WRAP
************

Shark-Infested Market
Jonathan Levinson

Treasuries got sold, gold rallied, and equities traded both sides
of unchanged in treacherous, low volume session kicking off day
one of options expiration week.

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




10 minute chart of the US Dollar Index





The US Dollar Index got slammed off its highs at 8AM EST and
other than a morning bounce, never looked back until its test of
the lows at 95.70.  The weakness benefited gold and the precious
metals indices, as well as the swiss franc, euro and CDN dollar.
The commodities index, the CRB, was up .24 to 237.20 led by
sugar, soybeans and platinum futures.


Daily chart of December gold




December gold had another very bullish day, up 5 to 362.90 and
peaking at 363.30, finally generating bullish signals on the
oscillators.  There were no daily buy signals printed, but
the downphases have now truncated with GC3Z approaching upper
descending trendline resistance at 367.  HUI broke to new 5 year
highs, adding 3.04 to 180.16, and XAU was up 1.27 to 87.71.

Daily chart of the ten year note yield




The rising trendline got tested on a spike but held back the
ascent of the ten year note yield, which closed higher by 8.2
basis points to 4.371%.  Evidently the one-day post-auction
honeymoon for treasuries is over, as most who bought tens at the
auction and the next day are now underwater.  The average yield
on the auctioned tens was 4.370%.  The TNX remains on sell
signals, however, and until the trendline is breached to the
upside, this remains just a retest for the TNX, what I call as
"return to the scene of the crime" rally.  Tomorrow will be an
important session in determining the fate of last week's treasury
rally.


Daily NQ candles




The Nasdaq futures had a good day for a change, bouncing off the
lower descending trendline and outperforming both the Dow and S&P
futures to the upside.  The 50 day EMA (pink line) held as
resistance on the move, and bulls are far from out of the woods.
However, the countertrend bounce against the oscillator
downphases above the 1200 support line was certainly positive for
the session.

30 minute 20 day chart of the NQ




Today's session was not an easy one to trade, and the 30 minute
chart of the NQ does not avail itself readily of obvious
patterns.  The action today felt like an upside breakout from a
small bullish descending wedge, but the failure at the descending
resistance line on the broader flag formation held it back.  The
confluence of this resistance line and Fibonacci resistance makes
1230 a key level for tomorrow's session.


Daily ES candles




The confusion of the session is reflected in the spinning top
doji on the ES daily candles, with ES adding 3.50 to close at
981.50 in a wide ranging, difficult day.  The market could not
get comfortable at lower or higher levels, testing the descending
upper trendline on the bull flag discussed in the weekend Futures
Wrap.  The oscillators are verging on buy signals, with the 50
day EMA providing downside support.


20 day 30 minute chart of the ES




Once again, the 30 minute candles are not particularly clear, but
ES appears to be trading a bear flag emerging from a bull wedge,
within the broader bull flag on the daily candles.  Riiiiight.
Nevertheless, the price is going higher, with the oscillators
reversing their sell signals early since Thursday.  This is not
bearish.  While I remain bearish on the longer term, the 30
minute chart suggests caution for bears and bulls alike.  The
cyclical picture is growing very muddy, and with the price
distortions implied by op-ex week, I don’t expect tomorrow to be
much easier than today.


2 day 150-tick chart of the ES




Other than the 10:30AM downdraft, sellers had a very tough time
of it today.  The intraday downphases tended to end abruptly and
early, despite some large volume sell programs.


Daily YM candles




YM actually managed to kiss the ascending trendline today at its
high before settling down to complete its spinning top, just like
the ES.  The oscillators are hinting at the possibility of buy
signals, particularly with the end of day surge, but none have
yet printed on the daily candles.


20 day 30 minute chart of the YM




On the 30 minute candles, the cycle downphases aborted early as
price just passed resistance at 9200, closing at 9203.  The
current formation appears to be a bear flag, but the bull wedge
breakout, if it's indeed the case, projects to a maximum of 9340.
With this many crosscurrents, it's easy to see why today brought
us so many surprises.


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

Expect modest tone from FOMC
By Jeff Bailey

Traders were cautious ahead of tomorrow's FOMC meeting with bond
and stock traders listening closely to what the Fed has to say
about the future rate of growth for the economy.

While many expect the Fed to be modestly upbeat, with no change
in the Fed's policy on interest rates, traders will be listening
with mixed emotions as to how fast the Fed believes the economy
will grow in the months ahead.

In recent months, it has been the scenario of good news that has
created some bad news from bond bulls as the thought of gross
domestic product growing at a 4% to 5% annual rate has had some
bond bulls pulling the plug on their Treasury bond holding,
making for a rather sharp rise in yields, which has the effect of
higher consumer borrowing rates, more notably in mortgage rates,
where the consumer has been refinancing existing homes, or
purchasing new homes as mortgage rates had plummeted to multi-
decade lows.

However, the thought of a more vibrant economy, that has yet to
show much in the form of job creation has some feeling the
consumer is still vulnerable, and an economy that is still in the
earlier stages of recovery, may be better off with a steady and
more fractional rate of growth, than a robust early surge in
growth, that has the cycle of a near-term balloon once again
deflating if consumer borrowing rates vastly begin outpacing jobs
growth.

I think the Fed, while positive on the economy, is going to have
to tone things down tomorrow as it relates to bullish comments
about the economy.

I truly feel, and perhaps the Fed might agree, the biggest threat
to economic recovery right now is the back up in Treasury YIELDS.
This becomes a number one concern of the Fed, and with that
concern, I think they'll keep the tone of comments as "gradual
improvement, with a slant toward weakness." These kinds of
comments may be focused toward the bond market, to have it
holding a bid, and not finding selling, which would put further
pressure on YIELDS.

This type of comment from the Fed, will undoubtedly be predicated
on the thought that this is the best type of commentary for the
markets at this time. If the Fed is too positive on the economy,
then Treasuries could sell off, potentially harming an economic
recovery.

Stock traders/investor may think they are doomed either way. And
while I use the word "doomed," it is probably too strong of a
word, but makes for a lower trade over the next several weeks.

Remember. The Feds primary job is to provide a healthy economy.
And while on the surface, if the Fed does lie a little about the
economy, in order to jawbone a bid into Treasuries to keep YIELDS
from rising further, it would be my guess, that this type of Fed
jawboning is the lesser of two evils. If the Fed is too positive
with its comments, then Treasuries sell off on thought of higher
interest rates coming from the Fed anyway, and stocks would most
likely suffer as YIELDS move higher. So, given these two
potential outcomes, why not try and keep the bond market intact,
and stocks, which have had a wonderful run from the March lows,
trend back a little (one-and-a-half step back, one step forward)
and give time for the job markets to improve.

Bond traders did seem a little more edgy than equity traders in
today's trade, with some selling in Treasuries finding YIELDS
backing up to levels found at last week's auction

On Wednesday, the Treasury auctioned off $18 billion of 5-year
notes with a yield ($FVX.X) of 3.3%, and today's trade saw
selling in this shorter-term bond find yield rising 5.7 basis
points to 3.255%, nearing Wednesday's auction price, as if to
test price support into tomorrow's FOMC meeting. The benchmark
10-year yield ($TNX.X) rose 8.2 basis points to 4.371%, right at
Thursday's auction yield of 4.37%.

On a technical basis, both YIELDS are at fairly important levels
for traders (stock and bond) to be cognizant of. Should either of
these bonds begin to discount from last week's auction prices,
both trades could unravel in selling, sending YIELDS higher,
which may then weigh more heavily on equities in the near-term.

While Treasuries found selling in today's trade, the U.S. Dollar
also exhibited weakness ahead of tomorrow's FOMC meeting, with
the U.S. Dollar Index (dx00y) 95.85 -0.52% falling 0.51 points,
as foreign investors looked to move some capital to other ports
around the globe.

I wanted to quickly discuss a rather simplistic supply/demand
observation as it relates to the dollar and Treasuries. When we
review the pivot analysis matrix, the U.S. Dollar Index (dx00y)
will show a close back below its monthly pivot, represent some
weakness in the Dollar since the end of July. Meanwhile, the 10-
year YIELD ($TNX.X) is below its July 31 closing YIELD of 4.474%.

One thing, make that... two things that have me more cautious of
stocks near-term is that the slight weakness in the dollar hints
to me that some money has left the U.S. At the same time, the
lower 10-year YIELD has found some buying, but I'm also rather
cognizant that the Treasury just auctioned $60 billion in debt.
Where did the money come from? While there is always some cash on
the sidelines, I'd have to say some of that cash used by
investors to take down $60 billion in government debt recently
auction, most likely came from equities, which have been range-
bound the better part of the last month. This supply/demand theme
of quite a bit of cash recently pouring into Treasuries may
further have been observed recently in the various declines among
the bullish % indicators we've been following on a nightly basis,
where we've seen a growing number of supply sell signals growing,
and bullish % falling.

Let's take a look at the pivot analysis matrix. In this weekend's
Ask the Analyst column, I showed this weeks pivot matrix at the
end of that article, which was built around quarterly pivot
analysis, something I had not performed on the S&P 500 Index
(SPX.X) 980.50 +0.3%.

Pivot Analysis Matrix




I've had intermittent connectivity with the Internet since 01:00
PM EST, and just after the markets closed for trading today, I'm
once again without a connection, so tonight's Index Wrap may be a
little different than I'm used to writing, as I have no way of
showing up-to-the-close charts of the various indexes.

My main observations are this, and they would most likely again
focus on the YIELD/Bank relationship, where despite a stronger
morning session for the S&P Banks Index (BIX.X) 302.05 -0.26%,
which had the BIX.X trading a morning high of 303.91, those gains
turned into losses and it wasn't long after the 11:00 AM EST
update, when the BIX.X turned fractionally lower, that the SPX
fell through a raised bullish stop at SPX 979, as a sell program
hit the SPX at approximately the 982 level, sending it to a
session low of 973.83.

I do remember looking at the BIX.X index during the day and
seeing its daily bar chart intervals showing Stochastics (5,3,3)
reaching the overbought level. It had been an earlier observation
last week that the BIX.X Stochastics turned higher from oversold,
just as the S&P 500 Index (SPX.X) was reaching what looked like a
peak trough on its daily Stochastics.

While I can't rule out an SPX trade to 988 target, the reason I
wanted to snug a stop at 979, was more in an attempt to NOT take
heat back to the 985 area, while also trying to give the trade
some room to work higher to a 988 bullish target. Unfortunately,
Treasury YIELDS along with the financial sectors didn't cooperate
in today's trade.

After writing this weekend's Ask the Analyst column, and
comparing that exercise in the quarterly pivot analysis, I
further felt an SPX bull might be hard pressed to get a trade
this week much above the 988 level as the MONTHLY Pivot and
WEEKLY S1 also provide a more formidable level of resistance,
considering Friday's bullish % reading of 73.4% and "bull
correction" status. I was looking for a bounce, and I think bulls
got the bulk of it in today's trade.

I would not say that there was anything alarming about the
bond/banks trade today, but there just wasn't enough boost from
the banks and financials a shot at 988. With correlative support
at 963 again, but still finding correlative resistance back near
988-989, these two levels, or range of 963-988 isn't all that
different that what we were looking at last week. Except that the
SPX is at the higher-end of that range.

Ideally, I wanted to exit a bullish trade in the SPX on further
strength at 988, sit the rest of the day, take in some YIELD/BANK
observations to then look for a short/put trade for a pullback
into the WEEKLY S1 area. However, not getting that, I do think it
fine for a bear to initiate a bearish trader here, but look for
some choppy trade over the next day or two around WEEKLY R1 of
988.

While I'm writing, I still don't have an Internet connection, but
I did post a chart of the S&P 500 Index (SPX.X) late Friday
evening in the market monitor with the new WEEKLY pivot analysis
levels on it. While this chart does not have the q-charts
generated bar for today's trade, I'm going to draw that bar on
the chart to simply give us an observation of how the SPX traded
with its MONTHLY (red) and WEEKLY (blue) retracement, with focus
on near-term resistance back near 988-990.

S&P 500 Index Chart - From Friday evening's market monitor.




After preparing the SPX chart with new weekly retracement Friday
night, then later writing the Ask the Analyst column, I though to
myself, "You'd better snug up a stop under an SPX bullish trade
if long from 965 and resistance looks formidable back near 989.

Trader's will note that this week's S1 of 963.7 takes the place
of last week's WEEKLY S2 where we found a nice level of support
that tied in with the BIX.X support of 296-297. As I look for the
SPX to slowly work lower, I'm not certain that I look for an SPX
test of WEEKLY S2 at 950 this week, but am more inclined for the
SPX to stall around the 990 level, and work lower from there.

I've also placed some past bullish % readings on the SPX at its
various inflection points of relative highs and lows to observe
internal weakening.

The Dow Industrials (INDU) 9,217 +0.28% made a late session move
back higher to finish up 27 points after 3M (NYSE:MMM) 141.90
+1.39% announced it would split its stock 2 for 1. For the most
part, the Dow Industrials trade mimicked that of both the S&P 500
Index and narrower S&P 100 Index (OEX.X) 495.12 +0.26%.

Hey! I just got a connection with the Internet in time to get
this screen capture of the Dow Industrials (INDU). So here's an
updated chart with today's trade.

Dow Industrials (INDU) Chart - Daily Interval




Not unlike the SPX and OEX, the Dow just ran out of steam with a
slight backup in YIELD, but came close to testing overhead
resistance near WEEKLY R1 of 9,268 and retracement levels found
from both the WEEKLY (blue) and MONTHLY (red) pivot analysis.

With technology stocks trying to firm in today's trade, and still
looking to have some bounce in them, I think a Dow trader might
tend to view 9,340 as more of a top of the range right now as
there isn't quite as much weighting with regional banks and
homebuilders as we find in the SPX and OEX, but I'm not looking
for much prolonged strength at the point above WEEKLY R1.

I will note that the Dow Industrials did close above both its
shorter-term 21-day SMA of 9,160 and 50-day SMA of 9,128, the
only major equity index, with our pivot analysis to do so, thus
the observation that its holding more of its momentum from the
March lows at this point and perhaps a beacon of strength for the
other major indexes.

Today's trade saw not net change in the very narrow Dow
Industrials Bullish % ($BPINDU), which remains "bull correction"
status at 80% bullish.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Interval




While the NASDAQ-100 Index (NDX.X) 1,223.14 +1.31% did trade its
WEEKLY pivot of 1,229.55 in today's trade with a session high of
1,230.26, the QQQ came a little shy. Often times, it would be the
QQQ that might be sloppier above resistance from a more bullish
retail base like you and I. However, I don't think that QQQ
traders are quite as aggressive as they've been in recent months
from the buy side.

I did like the QQQ from a bullish perspective on Friday as YIELDS
were falling and banks were bidding with a stop under the MONTHLY
S1 of $29.81, but I would have liked to have seen more
bullishness from the trade today. As such, I'd snug a stop up
under Friday's lows of $29.93, and be a willing seller from both
the long and short/bearish side of things back near $31.11.

Note how the QQQ stochastics are just turning up from "oversold"
levels. With Cisco Systems (NASDAQ:CSCO) having recently said it
is looking for a more modest 2% to 4% growth in revenue in the
coming quarter, it would take an entirely different tone from
AMAT to get the QQQ much above the QQQ's WEEKLY R1 of $31.35. I'm
not looking for such a surprise out of Applied Materials, where
their business prospects would most likely FOLLOW Cisco's.

Today's trade saw no net change in the NASDAQ-100 Index Bullish %
($BPNDX) as it remains "bear confirmed" at 64% for a second-
straight session. On Friday this bullish % lost 2 stocks new
reversing lower point and figure sell signals.

Well, it is getting late and my Internet connection is spotty at
best. I've only been able to briefly get enough connection at
this point to show full session updates on the Dow Industrials
(INDU) and NASDAQ-100 Tracker (QQQ), and perhaps not unlike a
bull placing a tight stop under an SPX trade, I'm going to try
and get this Index Trader Wrap wrapped up so when I get another
spot of internet connectivity, I can e-mail it to the HTML
department across town so they can upload it. Should I get stable
Internet connectivity between now and tomorrow morning, I will
try and have updated SPX and OEX charts in the 09:00 Update.

I apologize for this evening's inconvenience.

Jeff Bailey


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****************
WEEKLY FUND WRAP
****************

Stock Funds End Week Lower, Bond Funds Gain

Equity funds posted moderate losses for the week ended August 8,
2003, as the cautious tone on Wall Street continues, while fixed
income funds were generally higher, rebounding from a tough week
the week before.  A profit warning from retailer Costco added to
pressure on the Nasdaq Tuesday, which slid over four percent for
the week.  An increase in reported layoff announcements (highest
level in three months) also added to the negative tone.  For the
week, the S&P 500 large-cap index lost 0.2 percent.







Beyond the S&P 500 large-cap index, things were worse, with the
Wilshire 4500 index losing about two percent for the week.  The
tech-heavy NASDAQ declined in price by 4.2 percent for the week.

It was a week where conservative equity funds definitely held up
better than more aggressive types.  For example, large-cap value
funds gained 0.1 percent on average last week, per Lipper, while
small-cap growth funds fell by 3.2 percent on average.  Funds in
the tech sector lost 4.4 percent on average last week, while the
average gold fund shot up 6.8 percent, reflecting the volatility
in the market.

Meanwhile, bond mutual funds were generally higher for the week,
with the total U.S. investment-grade bond market as measured by
the Lehman Brothers Aggregate Bond index up over one percent in
the last five days.  Several fixed-income fund indices produced
average weekly returns of more than one percent.  The only bond
fund category in the red for the week was high-yield bond funds,
which declined 0.7 percent along with stocks.


Equity Fund Group


Below are selected Lipper equity fund indices for the 1-week and
year-to-date periods through August 8, 2003.  Balanced funds and
equity-income funds are "mixed equity" funds; both funds seek to
provide current income as well as long-term growth of income and
capital.  They were among the equity fund group's leaders on the
week, buoyed by their income components.


 Week   YTD    Selected Lipper Equity Fund Indices
+0.1%  +8.6%   Balanced Fund Average
+0.2%  +9.9%   Equity Income Fund Average
-0.3%  +10.6%   U.S. Large-Cap (Core) Fund Average
-1.4%  +14.9%   U.S. Mid-Cap (Core) Fund Average
-2.0%  +16.4%   U.S. Small-Cap (Core) Fund Average
-0.9%  +13.4%   U.S. Multi-Cap (Core) Fund Average
-4.4%  +22.9%   Science & Technology Fund Average
-0.4%  +11.4%   International Fund Average


The numbers above show that average weekly declines increased as
you moved down in market capitalization.  But losses also varied
based on sector orientation and equity style, with growth-biased
funds generally sustaining bigger weekly losses than their value
peers last week.  Small-cap growth funds lost over three percent
for the week, per Lipper, the worst performing diversified stock
fund category, while the average technology sector fund sank 4.4
percent.

Only a few funds manage to post a weekly gain.  The $3.4 billion
Dreyfus Appreciation Fund was one of them, rising 0.8 percent in
the last five days, while $15.5 billion Fidelity Dividend Growth
Fund returned 0.45 percent for the week.  Both funds have large-
cap blend styles, per Morningstar.  Scudder's Dreman High Return
Fund, an equity income fund, notched a 0.9 percent weekly return.

However, many more funds sustained moderate losses for investors.
Vanguard Capital Opportunity Fund, a $4.0 billion multi-cap core
fund, lost 3.1 percent over the week, while two popular Fidelity
multi-cap growth funds (Growth Company and OTC Portfolio) closed
the week down 3.2 percent and 3.4 percent, respectively.  In the
mid-cap growth and small-cap growth categories, Calamos Growth A
Fund lost 3.3 percent, while RS Emerging Growth Fund took a hard
fall, losing 4.6 percent for the week.

T. Rowe Price Science & Technology Fund, a tech-fund bellwether,
lost 3.75 percent for the week, better than a lot of tech funds.
For example, Fidelity Select Electronics Portfolio declined 6.2
percent, while Fidelity Select Computer lost 5.4 percent in the
last five days.  Alliance Technology Fund finished the week 4.6
percent in the red, so tough going in that sector.  Not all U.S.
sectors lost ground, however.  The $1.6 billion Vanguard Energy
Fund rose by 2.8 percent on the week as gas prices moved higher.


Fixed Income Fund Group


Below are selected Lipper fixed income indices for the 1-week and
year-to-date periods through August 8, 2003.  As you can see, the
only category in the red for the week was high-yield fixed income
funds, which lost 0.7 percent on average.  Investment-grade fixed
income funds were generally higher over the 5-day period.


 Week   YTD    Selected Lipper Fixed Income Fund Indices
+1.1%  +0.2%   GNMA Fund Average
+1.1%  -0.2%   U.S. Government Bond Fund Average
+0.4%  +1.5%   Short Investment-Grade Fund Average
+1.1%  +2.3%   Intermediate Investment-Grade Fund Average
+0.9%  +2.0%   Corporate A-Rated Debt Fund Average
-0.7%  +13.5%   High Yield Fund Average
+1.0%  +6.0%   Global Fixed Income Fund Average
+1.1%  +7.1%   International Fixed Income Fund Average


Other than junk bond funds, most fixed income funds were able to
recoup some of their losses from previous weeks.  The $22 billion
Vanguard GNMA Fund notched a 1-week return of 1.6 percent, one of
the better weekly performances among Ginnie Mae funds.  The $72.5
billion PIMCO Total Return Fund, meanwhile, notched a 1.5 percent
weekly return to outpace its intermediate-term, intermediate-term
peers.  JP Morgan Bond II Fund gained 1.7 percent last week while
Western Asset Management's Core Fund rose nearly two percent over
the 5-day period through August 8, 2003.

Global and international bond funds gained as well, finishing the
week up over one percent on average.  T. Rowe Price International
Bond Fund, a billion-dollar fund, generated a 1-week total return
of 1.4 percent, as did the Alliance Bernstein American Government
Income Fund.


Money Market Fund Group


Yield   Selected iMoneyNet Money Market Indices
0.53%   All Taxable MMF Average
0.39%   All Tax-Free MMF Average


The iMoneyNet.com all-taxable money market fund average remained
at 0.53 percent for a third consecutive week.  The PayPal Money
Market Fund (402-935-7733) remains the highest yielding retail
money market fund, with a current 7-day (simple) yield of 1.03%.
Cash Management Trust of America Class A (800-421-9900) is next
with a 0.99% 7-day yield.

The country's largest prime-retail fund, Fidelity Cash Reserves
sports a current 7-day yield of 0.82%, while the Vanguard Prime
Money Market Fund, another popular money market fund, currently
shows a 0.75% 7-day yield.  Vanguard's prime money fund's yield
declined four basis points, or 0.04%, compared to the prior week.


Fund News, Etc.


Morningstar.com's Fund Times report indicates that Vanguard Group
has filed a SEC registration statement for a series of targeted-
maturity "funds of funds."  These six new Vanguard targeted-date
funds are expected to be available in the fourth quarter of 2003.
They will comprise up to four Vanguard stock index and bond funds
in a range of asset mixes, and will be rebalanced as time goes on
to gradually decrease fund risk as the investor's retirement date
approaches.

Vanguard's targeted-maturity funds are similar to the funds today
offered by Fidelity Investments, which shows if you can't beat'em
join'em.  Vanguard Target Retirement 2045 Fund will invest 90% of
its assets in stock funds, 10% in bond funds.  The other Vanguard
target retirement funds will have the following initial asset mix
allocations:

  Retirement 2035 Fund (80% equity funds; 20% bond funds)
  Retirement 2025 Fund (60% equity funds; 40% bond funds)
  Retirement 2015 Fund (50% equity funds; 50% bond funds)
  Retirement 2005 Fund (35% equity funds; 65% bond funds)
  Retirement Income Fund (20% equity funds; 75% bond funds)

The last one doesn't add up to 100 percent, so there may be a 5%
allocation to cash (money market funds).  Check with the Vanguard
Group if you may be interested.  It'll be interestingly to see if
Vanguard's index-based fund of funds perform well relative to the
successful Fidelity targeted-maturity fund series.

Morningstar's report also indicates that the Vanguard Group fired
Newell Associates, one of the investment sub-advisers to Vanguard
Equity Income Fund (performance reasons).  Wellington Management
Company will reportedly run half of the fund's portfolio, up from
30 percent.  Vanguard's Quantitative Equity Group has also tabbed
to run 30 percent of the fund's assets.  John A. Levin & Co. will
continue to run the other 20 percent of portfolio assets.  Please
go to the Vanguard website (www.vanguard.com) for further detail.

In other Morningstar fund news, Strong Funds will acquire Matrix
Advisors Value Fund (MAVFX), an aggressive large-value fund that
makes big sector and stock bets, but has tended to hit its marks
more than it misses.  David A. Katz, the fund's portfolio manager
since 1996, will continue to manage the Morningstar 5-star rated
large-blend fund.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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A Review of The Use of Market Breadth
by Mark Phillips
mphillips@OptionInvestor.com

Due to a plethora of requests, I thought our time together this
week would be a good time to revisit the topic of market breadth.
I know there are numerous methods of measuring market breadth,
from looking at the advance/decline line, to new highs vs. new
lows to looking at the ratio of advancing volume to declining
volume.  The latter is the one that I have settled on, partially
due to familiarity, but also due to the way in which it seems to
filter out some of the noise that is often seen in other breadth
indicators.

Clearly, this is a tool that will be most valuable for those who
trade the major indices, such as the DOW, the SPX or the NASDAQ.
As most of you should now be aware, I've started applying more of
my trading focus to the e-mini futures contracts, rather than
options, for a long list of reasons that I initially covered in
my first article on futures trading back in early May.  For those
interested in my rationale, feel free to click over and check out
that introductory article at the following link.

The Case For Futures
http://www.OptionInvestor.com/futurescorner/fc_050503_1.asp

Our focus today is really vehicle agnostic though, as measures of
market breadth should work equally well whether one chooses to
trade broad market index funds, index options or index futures.
Likewise, our discussion here isn't tied to any one vehicle.
Regardless of what instrument you use for trading the major
indices, I believe your results can be improved by staying on top
of the market internals.  Back in January, I wrote an article on
the different measures of market breadth that are available for
our use within Qcharts.  That article was a follow-on to a couple
other market-breadth related articles I did in February and March
of last year, where I took the time to look at my own favorite
breadth indicator, ADVDECV.  This indicator is available for
either the NYSE or the NASDAQ and in those articles we looked at
some examples.  The link below will take you to the January
article, and has embedded links to the prior two articles for
those of you interested enough to go back to the beginning of my
journey of discovery.

Another Measure of Market Breadth
http://www.OptionInvestor.com/traderscorner/tc_011303_1.asp

As you can probably determine from that background information,
along with some of my Market Monitor comments, I've settled on
the use of ADVDECV.NY (for the NYSE) and ADVDECV.NQ (for the
NASDAQ) as my primary measures of market internals.  The usage is
quite simple -- only trade in the direction of the breadth trend.
There are some exceptions to that rule, but sticking to that
basic approach goes a long ways towards keeping us out of trouble
in these volatile markets we've been 'enjoying' these past few
months.

First a couple ground rules, though.  These indicators are not
useful for longer-term charts, having questionable utility at
anything longer term than a 15 minute chart.  My personal choice
is for a 5-minute chart.  I've played with different timeframes
all the way down to a 1-minute chart, but find the 5-minute view
strikes the best balance between being quick to show a potential
trend change and avoiding so much of the noise that shows up on a
1-minute chart.  There's greater detail on that microscopic
scale, but unless you are very actively (8-10 swings per day)
trading index futures, I think it tends to cloud the view of the
overall trend of the day.

The other important point to make is that I don't view the
ADVDECV indicator as a primary trade indicator.  Rather, I use it
to keep me from trying to trade against the day's trend.  As I'm
sure you all know, defining a trend these days can be a Herculean
task, with volatile and tight-range choppy markets the standard
fare.  When I look at the ADVDECV, it is to determine first if
there is an established trend for the day and whether that trend
looks solid or unsteady.  A steady bullish trend on the ADVDECV 2
hours into the day guarantees I won't be considering any bearish
trade entries unless/until there is a break of that trend.
Simply put, the ADVDECV is a trade filter, not a trade indicator.

But let's look at a couple examples and see how this indicator
might be of use.  For our examples, I'll be focused on the
ADVDECV.NY indicator for market breadth and the S&P 500 Cash
index (SPX.X) for price action.  Let's start by looking at a very
clear trend session, Friday August 1st.

ADVDECV Chart for the NYSE - Friday, August 1st




Almost without a pause, the ADVDECV began at the zero line,
quickly moved lower and after reaching a temporary low near
10:30am ET moved into a descending channel.  That channel finally
failed near 2pm ET, when ADVDECV broke sharply lower, beginning
an even steeper descending trend all the way to the closing bell.
Obviously from looking at this chart, there was no strength
present throughout the session, right?  I can hear you now, "Well
now, duh!  Any idiot can see that!"  Quite true, would be my
response.  But let's take a look at the same chart laid right on
top of price action in the SPX.

S&P 500 Price Chart vs. ADVDECV - Friday August 1st




The trend of the ADVDECV hasn't changed one iota, but how many of
you would have tried all afternoon to buy the apparent bottom in
the price chart?  With the weakness so clearly apparent in the
ADVDECV line, it should have waved off any attempts at bottom
fishing in the SPX.  That isn't to say that midday attempts to
short the SPX would have met with great success, but at least
those attempts would have been in alignment with the dominant
trend of the day and should not have created any unpleasant
results.

A perfect example is the failed rally near 1pm ET.  Price was
breaking above resistance that had been in place since 11:15am.
The apparent breakout over 983 might have had an eager bull
thinking the SPX was heading back up.  But a quick look at the
unbroken bearish trend of ADVDECV should have put the kibosh on
any such notion.  In fact, about 20 minutes later was the best
setup of the entire day for a continuation short, with (10,5,3)
Stochastics (not shown) starting to roll earthwards from their
only overbought alignment of the entire session.  Can you see how
the ADVDECV can help to clear your vision?  With a clear bearish
trend for the session, we should have abandoned all thoughts of
bullish entries (until/unless that trend was broken) and focused
only on the downside.  That would have had our mind looking for
the sort of bearish alignment that materialized just before
1:30pm ET.

Alright, that was a nice easy example and I'll be the first to
admit there have been all too few of those around here lately.
Let's fast forward to today's action, where the waters get a bit
muddier and see if we can find any utility from the ADVDECV.

ADVDECV Chart for the NYSE - Monday, August 11th




Now doesn't this look like the kind of mess we've had more often
than not, lately?  I apologize for the profusion of annotations
on the chart, but I've tried to color code things so that it
makes sense.  Clearly, the trend off the open was bullish, and
ADVDECV moved steadily higher through the end of the first hour
and then flattened out.  There was nothing to indicate whether
there would be a continuation or reversal until the break of the
green ascending trendline near 11:10am ET.  That was our
confirmation that the intraday trend had turned south, and it
remained a downtrend until the next trend reversal (break of the
red descending trendline) near 12:30pm ET.  From there into the
close, the trend was up, with the exception of a false trend
break near 3pm ET, a time that frequently gets a bit goosey with
the closing of the bond market.  So let's look at this chart in
relation to the SPX price chart and see how things might have
lined up.

S&P 500 Price Chart vs. ADVDECV - Monday August 11th




Like many more conservative traders, I normally eschew taking
trade entries right off the opening bell, as I still refer to it
as amateur hour.  But for traders that might have taken the long
entry at the open, the first sign of trouble would have come on
the break of the green ascending trendline on the SPX chart at
about 10:40am ET.  Confirmation of that weakness didn't really
materialize until about 30 minutes later when the ADVDECV chart
broke below its green ascending trendline near 11:10am ET.  That
was the green light for bearish entries in agreement with the
trend as described by ADVDECV.  More aggressive traders might
have guessed by 10:45am that the ADVDECV trend was weakening and
would break lower and could have acted on the earlier trend break
signal on the price chart, but there's no question that would
have been putting the cart before the horse.

That bearish trend was good for a trip down to the SPX 975-976
area, and the first sign that trend had ended came when price
broke its descending (red) trendline near 12:20pm ET, followed
about 10 minutes later by the ADVDECV breaking its own descending
(red) trendline and confirming another change of trend for the
day.  For the remainder of the day, the trend remained up,
although there could have been a bit of confusion near the 3pm
time slot, with the break of the final ascending (green)
trendline that turned out to be a false trend break.

In my estimation, there were only 3 viable trade entries for SPX
(whether trading the SPY, SPX options or SP/ES futures) traders –
- long off the open, reversing to short near 11am and then
reversing again to long near 12:30pm.  That isn't to say that
each/any of those trades would have worked out profitably, as
there are numerous other factors at play.  But can you see how
paying attention to this measure of market breadth could have
kept you from being on the wrong side of the intraday market
trend?

Here's a quick test.  Don't look at the ADVDECV chart, but look
at an intraday chart of the SPX with whatever trade indicators
you currently use.  How many short signal triggers would your
analysis have produced?  How many longs?  Regardless of the
answers, now look at the chart of the ADVDECV at the same time.
How many of the losers would the ADVDECV have eliminated?  How
many of the winners would it have kept you out of?

I fully recognize that there are some trade opportunities that
will be missed due to using this indicator as a filter and many
winning trades will be entered a bit later.  But the key benefit
is that it tends to eliminate a lot of the bad trade entries
where we're trying to pick either a top or bottom in an intraday
trend before it is ripe for the picking.

Best Trading Wishes!

Mark


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The Option Investor Newsletter                   Monday 08-11-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: PCAR, YHOO
Dropped Calls: None
Dropped Puts: None
Play of the Day: Call - STJ
Watch List: Speaking of Splits

Updated on the site tonight:
Market Posture: Dog Days of August


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

St. Jude Medical - STJ - close: 55.50 change: +1.27 stop: 52.50

Company Description:
St. Jude Medical is engaged in the development, manufacturing and
distribution of medical technology products for the cardiac
rhythm management, cardiology and vascular access and cardiac
surgery markets.  The company has two principal business
segments, Cardiac Rhythm Management (CRM) and Cardiac Surgery
(CS).  The CRM division is focused on bradycardia pulse generator
and tachycardia implantable cardioverter defibrillator systems,
interventional cardiology catheters and vascular closure devices.
The CS group provides mechanical and tissue heart valves and
valve repair products as well as suture-free devices to
facilitate coronary artery bypass operations.

Why we like it:
After peaking near $64 in the middle of June, shares of STJ were
overdue for a bout of profit taking, but investors weren't quite
prepared for the staggering 24% slide that took place over the
next month.  After reaching bottom near the $48 level, the stock
rebounded and has been consolidating in the $53-55 area for the
past 2 weeks.  This sideways consolidation looks like a
continuation pattern, and when it breaks to the upside, it should
have room to run to the $60 area.  Of course, it won't be a cake
walk, as there is potential resistance layered at $57 and then
again at $59.  But before we can start looking for upside
objectives, the stock will need to break from its current
consolidation pattern.  The 50-dma ($55.73) provided solid
resistance on Friday, as the stock was quickly turned back from
an attempted rally through that level.  Looking at the PnF chart,
it becomes clear that $56.00 is a formidable obstacle and the
stock will need to trade $57.00 to generate a new Buy signal and
give us the 'green light' for a bullish play.

We're going to sneak our entry trigger a bit below that level
though, looking for a break above $56.05 before considering the
play live.  Momentum traders will want to enter on the initial
breakout, looking for a quick move upward.  More conservative
traders will want to look for a pullback after the initial
breakout, looking to buy a dip and rebound in the $54.50-55.00
area.  Because of the tight consolidation over the past couple
weeks, we can set at tight stop at $52.50, just below the 20-dma,
which appears to be bottoming at $52.73.

Why This is our Play of the Day
We normally don't feature an untriggered play as our Play of the
Day, but in this case, it seems warranted to make an exception.
Shares of STJ made an earnest attempt at a breakout over the 50-
dma last Friday, but couldn't quite hold altitude.  Today, the
stock gapped upwards and held right near the high of the day
right into the closing bell.  The stock looks poised to deliver
that breakout we mentioned over the weekend, and clearing the 50-
dma ($55.72) on a closing basis will be a good start.  We're
keeping our official trigger at $56.05, as a trade at that level
would indicate some conviction on the part of the bulls.
Momentum entries on the initial breakout look favorable, although
more conservative traders may want to wait for a subsequent test
of the $55-56 area as newfound support.

Suggested Options:
Shorter Term: The September 55 Call will offer short-term traders
the best return on an immediate move, as it will be in the money
when the play is triggered.

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the September 60 Call.  This
option is currently out of the money, but should provide
sufficient time for the stock to move higher without time decay
becoming a dominant factor over the short run.  More conservative
long-term traders will want to use the October 60 Call.

BUY CALL SEP-55 STJ-IK OI= 241 at $2.60 SL=1.25
BUY CALL SEP-60 STJ-IL OI= 445 at $0.60 SL=0.30
BUY CALL OCT-60 STJ-JL OI= 730 at $1.20 SL=0.60

Annotated Chart of STJ:



Picked on August 10th at   $54.23
Change since picked:        +1.27
Earnings Date            10/15/03 (unconfirmed)
Average Daily Volume =   2.19 mln



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Watch List
**********

Speaking of Splits

3M - MMM - close: 141.90 change: +1.95

WHAT TO WATCH: After nine long years MMM finally approved another
stock split.  It's been a long time in coming as the conglomerate
has been trading above the $100 mark since late 2000.  3M last
split 2:1 in April of 1994.  Its $1.95 gain lifted the Dow
Industrials and helped its own shares breakout of a short-term
bull flag consolidation pattern.  The stock looks very overbought
but any shorts still in this screamer are probably running for
cover, so it could get even more overbought.  A move over
resistance at $142 could certainly attract more momentum players.
The 2-for-1 stock split will be September 29th for shareholders
on record as of Sept. 22nd.

Chart=


---

Advance Auto Parts - AAP - close: 68.10 change: -0.44

WHAT TO WATCH: Still trading near 52-week highs, shares of AAP
are holding on to its recent bounce.  The stock sold off somewhat
after reporting earnings on August 6th where the company beat
estimates by 16-cents.  Dip buyers quickly stepped in near the
$65 level and bulls are trying to push through resistance at $69.
Keep an eye on it for a move above $69 or $70, preferably on
strong volume.  We were unable to discover if AAP had any
previous splits but as it continues to climb higher it could
certainly be a candidate.

Chart=


---

Boston Scientific - BSX - close: 65.14 change: +0.91

WHAT TO WATCH: BSX has been on and off the watch list for a
couple of weeks now.  Shares rocketed higher in late July, which
pushed shares out of its bull flag consolidation pattern - a
clear buy signal.  Unfortunately, bullish momentum traders had
been unable to break above the $65.00 level of resistance.  The
stock has been stuck churning sideways between $62.50 and $65.00
that is until today.  BSX turned in a new closing high.  Momentum
traders might see this as an entry point.  The next logical
target would be $70.

Chart=


---

JetBlue Airways - JBLU - close: 48.04 change: +1.22

WHAT TO WATCH: Speaking of splits this transportation stock may
be ready for another one.  JBLU is seriously out performing its
peers in the XAL airline index.  The stock just broke to another
all time closing high on decent volume.  The stock last split 3:2
in December 2002.  Shares are already past their previous split
level but as a new issue there isn't a lot of history to tell
where management likes to split its shares.  A pull back to $45
might look like a decent entry point for bulls but from the looks
of it there aren't a lot of sellers.

Chart=



**************
MARKET POSTURE
**************

Dog Days of August

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/mp_081103.asp


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

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