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Daily Newsletter, Thursday, 08/21/2003

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The Option Investor Newsletter                Thursday 08-21-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Five Year High
Futures Markets: The Air up There
Index Trader Wrap: See Note
Market Sentiment: Bear Market in Fear
Weekly Manager Microscope: Tony Maramarco: Babson Shadow Stock
(SHSTX)


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      08-21-2003           High     Low     Volume Advance/Decline
DJIA     9423.68 + 26.20  9481.44  9391.89 1.71 bln   2020/1170
NASDAQ   1777.55 + 17.00  1783.64  1762.97 1.71 bln   2060/1191
S&P 100   502.04 +  0.15   505.90   500.57   Totals   4080/2361
S&P 500  1003.27 +  2.97  1009.53   999.33
W5000    8715.26 + 44.00  9757.90  9671.31
RUS 2000  494.82 +  5.36   494.82   489.46
DJ TRANS 2681.65 + 19.80  2685.17  2659.34
VIX        19.53 -  0.18    20.56    19.38
VXN        28.28 +  0.64    29.13    27.33
Total Volume 3,690M
Total UpVol  2,577M
Total DnVol  1,017M
52wk Highs  815
52wk Lows    56
TRIN       0.81
NAZTRIN    0.67
PUT/CALL   0.69
************************************************************

Five Year High

Believe it or not but it has only been a week since the power
went out in the Northeast and the markets set new highs today.
Not five year highs but new highs. The Philly Fed was the high
stepper that blew away numbers for the last five years but the
markets did not match its performance. However, if the economics
keep up this rate it will not be long before the markets catch
up.

Dow Chart



Nasdaq Chart




Starting the morning off positively was a Jobless Claims number
that surprised some traders. There were only 386,000 new claims
registered for the week that included the blackout. Does that
give you a clue where I am headed? The prior week was revised
up to 403,000 but nobody seemed to care about the old news.
Nobody seemed to consider the 54 million people without power on
Friday who were unable to apply for benefits. Those same people
were probably more interested in keeping everything in the
freezer from spoiling instead finding the unemployment office.
Getting gas to go to downtown was also a challenge. The Labor
Dept said that the states with the biggest claims were not in
the Northeast and therefore they did not expect a major revision.
Ok, while I do not think we will see a major revision over
400,000 for this week I would be concerned that next week could
be a shocker. Still we will not begin to see the real picture
until the week after Labor day when the real work begins.
Vacations will be over, summer help back to school and the
last quarter push for holiday money begins. The 4-week moving
average fell to 394,250 and the lowest level since Feb.

Also providing a boost to the markets was the Leading Indicators
for July which came in at +0.4% and the fourth consecutive month
of gains. This was inline with estimates. Five of the ten
components rose which was slightly less than the 8-of-10 in
May. The Conference Board even went so far as to compare the
current performance with late 2001 when the index bounced and
then failed to hold as the economy fell back again. This was
an unusual step for the Board to suggest that there was a
downside potential. They stress the index shows an economy
poised to rebound but that rebound is far from certain. This
less than cheerful outlook was completely ignored once the
Philly Fed hit the wires.

The Philadelphia Fed Survey exploded past estimates of +10 with
a very strong +22.1. This is completely unheard of to see such
a bounce in manufacturing conditions in one month. The index
jumped to a five year high and internal components were strong.
Shipments rose to 16.3 from 9.1, New orders 14.6 from 10.4 and
six month outlook to 62 from 56.9. Not rising were the average
work week at 4.7 from 5.1 and employees to -8.7 from +0.8. Also
surprising was the jump in prices paid to 16.0 from -6.5.
Obviously the jump in manufacturing has not been enough to
translate into new jobs with capacity utilization at 75%.
Inventories remained low at 6.4 and show no confidence in
future demand.

The bad news bulls did not know how to react to the good news
and after the initial spike the markets trended lower the rest
of the day. This was surprising when you consider tech stocks
got some help from Craig Barrett the CEO of Intel. He said it
was too early to call it a recovery but they were seeing some
buying "here and there." He qualified specifically with "We're
not seeing a big upgrade cycle and we're not seeing IT budgets
being raised." Still techs raced higher at the open and closed
at a new 52-week high of 1777. The semiconductor sector found
the most excitement and raced to a new high at 435 and a +13
point gain. Over the last ten days the SOX has climbed from
366 to 435 and nearly a +19% gain. Helping to power this gain
was a report that the capacity of chip factories had risen to
85.9% utilization for the period ending in June. This is a new
high since the 64% bottom in the 3Q-2001. This has been the
worst slump in the 50-year history and analysts suggest the
capex dam could burst next year if the trend continues. Much
of the increase in utilization has come from the closing of
plants do to the glut. The survivors are now poised to rebound
out of the slump and back into boom time. All they need is
demand. Considering most chip companies are expecting 3Q
demand to be less than previously expected it would appear
somebody is wrong.

Also providing some sentiment gains before the open was the
news that Chemical Ali had been captured in Iraq. He was number
five on the most wanted list. He had initially been thought to
have died in a bombing of his palace but recent intelligence
had brought him back to life and pointed out his location.
The continued discovery of Iraqi top-level fugitives due to
tips from informers suggests the noose around Saddam is getting
tighter on a daily basis. He is said to be moving every four
hours and that alone exposes him to many more eyes than hiding
in a basement somewhere.

Financial instruments were credited with some of the market
gains. The dollar rose to a four-month high with a +2% gain
over the Euro and some analysts were crediting stock gains
to the dollar strength. Did I miss something? I thought the
majority of blue chips actually hit earnings estimates last
quarter based on the benefits of a falling dollar. Our
products are cheaper and the currency translations produced
extra profit. AMZN for instance said they made $54 million in
currency exchange due to the weak dollar. With the dollar at a
four-month high it would seem to me that benefit has expired.
Bonds came under pressure today with yields rising on the
10-year note to 4.49% and right back at the key 4.5% level
that tends to bleed money from equities. Financial stocks,
which had been strong, sold off from the opening high on
worries that a bond failure is still lurking in the darkness
and we could begin to see some earnings warnings soon from
bond losses.

Bonds also took a hit after the minutes of the June FOMC
were released. There was considerable discussion about using
alternative means to provide stimulus if they ran out of
rate cuts. However, the general consensus of opinion was
no alternative methods were necessary and that took the
pressure off bonds. If they feel the Fed is powerless or
gutless when it comes to taking future aggressive steps
then there is nothing to keep rates low. It was also learned
that 3 of the 12 Fed banks wanted to cut rates by 50 points
instead of 25. The minutes provided a look at a very confused
Fed that was puzzled about the lack of growth and going to
do nothing in the foreseeable future to add more stimulus.
Parry was eventually the lone dissenter on the vote to cut
only 25 points. His recent publicized appearances echoed
his comments in the minutes that he has not yet seen any
evidence that a recovery is really underway. This is not
a bullish picture being painted by the group.

Also hitting new highs was gasoline with a +9.5% move and a
move not seen in 19 years. With refineries running at over
95% capacity and no reduction in summer demand the prices
keep moving higher. This is going to translate into lower
profits for shipping companies, airlines and any company that
spends a lot of money on transportation. The consumer may also
be finding less money in their pocket from that reduced tax
withholding with the addition of the price hikes. Commuters
are going to be less bullish when the sentiment surveys hit
them and I would bet those numbers take another energy hit.

Some well-known drug stocks took a hit starting with Pfizer.
Their estimates were cut due to generic concerns for two of
their well known products Lipitor and Viagra. PFE fell to
$29.75 and a new five-month low. SGP warned after the close
that 2004 earnings would be less than 2003 and they were
cutting 1000 jobs. They also cut their dividend from 17 cents
to 5.5 cents. Prior to the cut SGP was in the top 10% of
high yielding S&P companies. The stock went out at $16.50
and the announcement was made after trading was closed.

The Dow came within 2 points of closing at a new 52-week high
but did make a new intraday high at 9481. It was not a boring
day for the Dow with the spike to nearly 9500 at the open.
About 11:00 AM a large sell order in the S&P futures pushed
the Dow to its low of 9391, almost -100 points off the high
and were it not for the Philly Fed blowout the results could
have been much different. Those numbers calmed the bearish
sentiment at the time but never completely cured it. The
Nasdaq blasted off to a new 52-week high at 1783 but ran
into a dead end and was not able to break 1780 the rest of
the day. The Nasdaq run has been amazing and it is up +76
points for the week mostly on the strength of the semi stocks.
Despite the indexes finishing off the highs there were 815
new 52-week highs and only 56 new lows.

Friday should be a tossup. There is so much bullishness the
bears are afraid to short. Those holding stocks with strong
profits are afraid to sell. It is a catch-22. Current shorts
are trying to cover but nobody holding wants to sell. It is
a bullish scenario made in heaven, as long as it lasts. The
daily new highs continue to fuel new interest in buying but
the low volume is keeping new buyers on the sideline. Traders
are holding their collective breath and hoping for a pullback
to enter. Professional traders are extremely confused by the
lack of a summer sell off. When the market continues to go
up when it should be going down all the rules go out the
window. Everyone but Abby Joseph Cohen thinks stocks will
have a tough time hitting the aggressive earnings estimates
in light of the weak demand. Abby raised her estimates for
2003 and 2004 in light of the solid growth in the first half
of the year. Abby is definitely reading from a different
playbook than many others.

The only economic reports on Friday are the ECRI Weekly
Leading Indicators and Internet Commerce Sales. Neither has
any real market impact. YHOO, EBAY and AMZN could be impacted
depending on the Internet Sales numbers but it is not a broad
market mover. With large gains and extreme levels for the week
it will be interesting to see if we get a bout of profit
taking or another round of panic buying by the shorts. We have
had some big Fridays in recent months in both directions.
Until the actual selling begins on strong volume I would
continue to dance until the music stops. Once it does stop
the race for sideline chairs could be frantic. If August and
September are the two worst months of the year and this is
the bad news than I can't wait for the good months that
follow. But then we still have September and October in our
path.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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

The Air up There
Jonathan Levinson

The NQ and YM printed new highs today, as treasuries and precious
metals sold off.

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





10 minute chart of the US Dollar Index




The US Dollar Index rose impressively today, with the buying
frenzy commencing with Europe's open and continuing throughout the
day, reaching a spike high above 98.80.  Gold and the precious
metals indices got sold aggressively, while the CRB was strong,
breaking and holding above 240 on strength in heating oil, cocoa,
crude oil, coffee and natural gas futures.


Daily chart of December gold




December gold valued in US Dollars got clocked from the get-go,
but did better in other currencies as they tumbled relative to
the Dollar as well.  December gold was down 5 at 362 as of this
writing, with the HUI down 6.71 to 183.77 and the XAU –3.15 to
88.03.

I've heard it said that the smart money likes gold, but the
smarter money likes silver.  As discussed in last night's Market
Wrap and for the past year, the Fed's inflationary, or, in its
words, "anti-dis-inflationary" campaign has served to boost the
prices of hard assets, thus the precious metals, real estate and
commodities rallies we've been seeing for the past years.  Much
has been said about Warren Buffet's silver position, the
reputedly monumental short interest on silver, and a plethora of
other chapters in "the story" that ignites silver bugs.  Without
getting into a discussion of silver's fundamentals, I've put
together some charts to give us a preliminary technical view of
the commodity.

The following is worth a look.  It's not my chart, and I do not
know the basis on which the data has been assembled, but I find
it fascinating:

Multi-century chart of silver and gold:silver ratio



courtesy of www.sharelynx.com

40 year chart of silver (log scale)



courtesy of www.Sharelynx.com


Weekly chart of December silver




The 10 week stochastics on December silver are in an upphase on
the steep climb off the higher low printed in June.  Descending
resistance is in place since 1999, and was briefly violated on
the July spike high.

Daily chart of December silver





The steep move off the low in June has formed a pennant, as bulls
and bears are forced into an ever-narrowing battlefield.  The
daily cycles are mixed, trying to put in a higher low on the move
off the July high.  On a trading basis, this remains a difficult
spot in which to scope for entries in silver, and the more
prudent strategy is watch how price behaves on the next visit to
either the or lower trendlines.


Daily chart of the ten year note yield





The Fed had 24.5B in expiring repos owed to it today by its 22
primary dealers, and refunded only 11B.  11B is a lot of money,
but the net drain of 13.5B wreaked havoc on the bond market
today, with treasury yields rallying throughout the session.
There was much ado about the bullish initial claims data, which
declined amidst no mention of the unofficial holiday last Friday
which effectively shut down much of the country during the
widespread power outages.  Nonetheless, pundits were bulling the
initial claims and the Philly Fed blowout at noon, both of which
were credited with the impressive selloff in bonds.  The selling
slowed toward the end of the session, leaving ten year note yield
with a bullish morning doji star for the day.  The TNX gained
12.6 basis points to close at 4.507%, the FVX gained 22 bps and
the TYX 5.5 bps.


Daily NQ candles




The NQ led to the upside again today, up 1.15% compared with .33%
for the ES and .27% for the YM.  It broke to a new yearly high at
1321, exceeding the previous high by one point, closing at
1314.50.  In the end, it was one positive day added to the now
week-long run, but the upside gains were less than yesterday.
Regardless, the up-trend is in the process of being regained,
absent a pullback tomorrow.

30 minute 20 day chart of the NQ




The NQ advanced further within its bear flag on the 30 minute
candles, and the oscillators, which looked good for a sell signal
following the morning's decline, have reversed back up.  They are
now trending under the influence of the daily cycle uptrend,
making their signals unreliable.  On a swing basis, traders will
want to watch the upper and lower trendlines for a sign.  Until
either one is breaking, the oscillators on this timeframe will be
unreliable as the longer cycle upphase pins them in overbought
territory.

Daily ES candles




The ES was again weaker than the NQ, and the oscillator buy
signals are weaker on the daily chart.  This weakness reflects
itself in the 30 minute chart below, with the price advancing
closer to the lower ascending trendline of its bear flag.

20 day 30 minute chart of the ES




What is a clear buy signal on the 30 minute NQ chart is but a
twitch in the ongoing downphase of the ES.  It appears that if
this rally is to break, the ES and YM will be the ones to lead
the way to the downside.

Daily YM candles




Nothing to add on the YM, except that it lagged the ES, and is
testing the lower trendline of its bear flag for the second day
in a row, despite this morning's break to a new year high.

20 day 30 minute chart of the YM




The new highs and positive closes was a clear victory for bulls,
while the lack of upside momentum favored the bears.  The selloff
in treasuries appeared to favor no other participant but the Fed,
most likely encouraged by the refunding of its repo money.  The
US Dollar rally took a bite out of gold's advance, but caused no
serious technical damage, with the pullback easily contained by
the ongoing pennant formation.

Tomorrow should bring the volatility we've come to expect from
late summer trading, as the markets debate whether equities are
ready to launch the next leg of this year's rally.  Both bulls
and bears expect some sort of pullback here, as the put to call
ratio was steadily higher today than yesterday, and options
volatility was modestly higher within its ongoing bear market in
premium.  Caution remains key.


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_082103_1.asp


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

Bear Market in Fear
Jonathan Levinson

The put to call ratio and the option volatility or "fear" indices
advanced slightly today as equities tried for new rally highs,
round-tripping on the Dow and S&P while adding 17 on the Nasdaq.

Fear remains exceptionally, awe-inspiringly low in the markets.
One can only wonder as to why.  The NDX volatility index, the QQV
collapsed to an all-time low of 20 last week, and has managed to
rise 20% to 24.04 as of today's close.  To put that in context,
the range for 2002 was 30.23 to 64.31, with the 30.23 coinciding
with the QQQ's March top.  Seeing the QQV trade below the S&P
volatility index, the VIX, was a sight to behold last week, but
few noticed.   Premium on QQQ options remains very low.  The
amount of premium for which a seller of contracts is willing to
settle remains very low.

The key appears to be that options are being aggressively sold.
If so, then this points to increasing levels of speculation and
hedging by option writers, generally thought to be the "smart"
money.  As a small trader, the message I take from this is that
the markets are growing more dangerous, as the increasing amount
of leveraged speculation virtually guarantees sudden swings and
"corrections" when the derivatives tail wags the underlying dog.
Option premiums haven't tended to stay low for long during recent
years, and the QQV and VXN have just days ago printed all-time
record lows.

Whether this action is screaming "buy!" or "sell!" for the
equity indices remains an open question.  Following the trend of
recent years, I'm inclined to err to the "sell" side, and err I
have.  Either way, the message for bullish and bearish traders is
that volatility is low, it hasn't tended to stay that way for
long, and caution is warranted on either side of the trade.


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

Market Averages

DJIA ($INDU)

52-week High:  9481
52-week Low :  7197
Current     :  9424

Moving Averages:
(Simple)

 10-dma: 9328
 50-dma: 9182
200-dma: 8588



S&P 500 ($SPX)

52-week High: 1015
52-week Low :  768
Current     : 1003

Moving Averages:
(Simple)

 10-dma:  989
 50-dma:  990
200-dma:  917



Nasdaq-100 ($NDX)

52-week High: 1319
52-week Low :  795
Current     : 1315

Moving Averages:
(Simple)

 10-dma: 1262
 50-dma: 1251
200-dma: 1108



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

The VIX remains pegged under the 20 level while the VXN could be
producing an "oversold" bounce, if that can occur in such an index.

CBOE Market Volatility Index (VIX) = 19.53 -0.18
Nasdaq Volatility Index (VXN)      = 28.28 +0.64


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.62        509,982       316,318
Equity Only    0.49        450,740       220,436
OEX            1.29          7,903        10,166
QQQ            3.02         12,773        38,539


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

Bullish Percent Data

           Current   Change   Status
NYSE          70.0    + 0     Bull Confirmed
NASDAQ-100    72.0    + 4     Bear Correction
Dow Indust.   80.0    + 0     Bull Correction
S&P 500       76.8    + 1     Bull Correction
S&P 100       84.0    + 2     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  0.91
10-Day Arms Index  0.89
21-Day Arms Index  1.00
55-Day Arms Index  1.08


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    1856      2001
Decliners     967      1088

New Highs     228       254
New Lows       17         9

Up Volume   1112M     1259M
Down Vol.    533M      402M

Total Vol.  1702M     1701M
M = millions


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

Commitments Of Traders Report: 08/12/03

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

Commercials added slightly to their long positions in the S&P,
whilesmall traders maintained their positions, adding a net 761
contracts for the week.


Commercials   Long      Short      Net     % Of OI
07/22/03      411,206   442,131   (30,925)   (3.6%)
07/29/03      405,429   445,114   (39,685)   (4.7%)
08/05/03      395,633   450,988   (55,353)   (6.5%)
08/12/03      399,414   456,767   (57,353)   (6.7%)

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
07/22/03      155,891    76,466    79,425    34.2%
07/29/03      155,216    73,030    82,186    36.0%
08/05/03      159,971    72,951    87,020    37.4%
08/12/03      158,821    71,040    87,781    38.2%

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


E-MINI S&P 500

Commercials added heavily to their long positions in the e-mini,
posting their most bullish reading of the year, while small
traders added further to their short positions.


Commercials   Long      Short      Net     % Of OI
07/22/03      249,392   249,386          6     0.0%
07/29/03      272,659   216,166     56,493    11.6%
08/05/03      310,662   249,004     61,658    11.0%
08/12/03      306,014   217,233     88,781    17.0%

Most bearish reading of the year: (354,835)  - 06/17/03
Most bullish reading of the year:   88,781   - 08/12/03

Small Traders Long      Short      Net     % of OI
07/22/03       45,945    76,071   (30,126)  (24.7%)
07/29/03       44,437    93,144   (48,707)  (35.4%)
08/05/03       56,663    95,919   (39,256)  (25.7%)
08/12/03       62,534   106,403   (43,869)  (26.0%

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


NASDAQ-100

Commercials and small traders moved in the same direction on the
NDX, as commercials lightened up slightly on their short
positions, while small traders added to their longs.


Commercials   Long      Short      Net     % of OI
07/22/03       32,502     48,139   (15,637) (19.4%)
07/29/03       31,456     50,294   (18,838) (23.0%)
08/05/03       32,813     52,383   (19,570) (23.0%)
08/12/03       34,374     53,015   (18,641) (21.3%)

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
07/22/03       27,321     8,844    18,477    51.1%
07/29/03       25,691     7,810    17,881    53.4%
08/05/03       22,188     7,783    14,405    48.1%
08/12/03       23,957     7,871    16,086    50.5%

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

DOW JONES INDUSTRIAL

Commercials added slightly to their long positions on the Dow, but
the move was sufficient to post a new bullish high for the year,
close to reaching the October 2001 high of 15,135 contracts.
Small traders added more substantially to their shorts.


Commercials   Long      Short      Net     % of OI
07/22/03       22,198     8,176   14,022      46.2%
07/29/03       23,696     9,572   14,124      42.5%
08/05/03       23,981     9,264   14,717      44.3%
08/12/03       24,942     9,878   15,064      43.3%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
07/22/03        6,110    10,898   (4,788)   (28.2%)
07/29/03        5,744    11,601   (5,857)   (33.8%)
08/05/03        5,716    10,422   (4,706)   (29.2%)
08/12/03        6,933    13,248   (6,315)   (31.3%)

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 MANAGER MICROSCOPE
*************************

Tony Maramarco: Babson Shadow Stock (SHSTX)

Investors seeking high-growth potential and to diversify their
equity portfolios may wish to consider the Babson Shadow Stock
Fund managed by Tony Maramarco of the Babson Funds Group.  The
Shadow Stock Fund is one way to invest in a highly diversified
portfolio of the smallest U.S. companies and to participate in
their above-average growth potential.

Tony Maramarco, a senior VP, portfolio manager and analyst with
David L. Babson & Company, has managed the micro-cap fund since
May 1999.  Before joining Babson in 1996, Maramarco was a vice
president and analyst with Concert Capital Management from 1993
to 1996.  From 1985 to 1993, he was a second vice president and
analyst with MassMutual (Massachusetts Mutual Life Insurance).

Mr. Maramarco began his investment career in 1981 at Connecticut
National Bank as an investment research officer.  He has earned
the right to be called a Chartered Financial Analyst (CFA).  In
managing the Babson Shadow Stock Fund, Maramarco relies on both
his analyst skills and portfolio management skills because this
fund invests in small stocks that are generally not on the radar
screens of institutional investors.

Investment Style/Strategy

The investment objective of the Shadow Stock Fund is high growth
potential over time.  Maramarco seeks to achieve the fund's goal
by investing in stocks of firms with tiny market capitalizations
of under $175 million, which have been neglected by institutional
investors.  By following a value discipline and spreading assets
across numerous holdings, Maramarco strives to achieve long-term
growth, while providing some protection from market declines and
fluctuations.

The Babson Funds website (www.babsonfunds.com) indicates the fund
is guided by a patient investment philosophy, which seeks maximum
growth over time.  Mr. Maramarco follows a disciplined investment
process that seeks to identify stocks in micro companies with low
valuations, which are currently "out of favor" with institutional
investors.  He keeps the fund's turnover low because it often can
take some time these stocks to emerge from the "shadows" into the
light of interest by institutional investors or to become targets
of a merger or tender offer by another company.

Babson Shadow Stock Fund seeks to capitalize on academic studies,
which suggest that three characteristics have historically led to
above average stock performance: 1) small size, 2) low price/book
valuation, and 3) neglected by Wall Street.  Maramarco identifies
stocks with these characteristics, selecting holdings among those
that have also been profitable.

Because small stocks generally are riskier than stocks of larger,
established companies, Maramarco spreads the fund's assets across
a large number of holdings (typically over 200).  The result is a
more diversified portfolio than many other small-cap funds on the
market.  That helps to reduce risk relative to the market and its
category peers.

Looking at Morningstar's latest report on the Babson Shadow Stock
Fund, the fund sported an average market cap of just $207 million
at May 31, 2003 with approximately 20% of assets in the small-cap
range and 80% in the micro-cap range.  Because they're so tiny in
size and generally neglected by Wall Street, micro-cap stocks can
behave differently than other parts of the market, offering extra
diversification.  But, because of their special risks and general
lack of liquidity, the Babson Shadow Stock Fund should be used to
round out one's portfolio, not as a core holding.

In terms of valuations and growth rates, the report indicates the
Babson Shadow Stock Fund had below average price valuations as of
May 31, 2003 relative to both the S&P 500 large-cap index and its
Morningstar category peers (i.e. small-value funds).  At the same
time, Maramarco's fund had above average growth rates compared to
the S&P 500 index and category peers.  So, the fund stays true to
its original thinking, favoring low price-to-book stocks that are
profitable.  Still, Maramarco takes no chances, diversifying fund
assets over 270 holdings and avoiding any chance of a big torpedo
sinking the fund.

The Babson Funds website provides a more current look at holdings
as of July 31, repeated below for your convenience.

  Babson Shadow Stock Fund Top 10 Holdings (July-31):
  Nam Tai Electronics 1.8%
  Compucredit Corp 1.7%
  Stewart Information Services 1.3%
  Imagistics International Inc 1.3%
  CSK Auto Corp 1.3%
  M/I Schottenstein Homes Inc 1.3%
  Ulticom Inc 1.2%
  Meritage Corp 1.2%
  URS Corp 1.2%
  Finish Line Class A 1.1%

Top sectors information at July 31 was unavailable, but according
to Morningstar's report, one of the fund's most notable features
at May 31, 2003 relative to other small-cap value funds was its
relatively low weighting in the healthcare sector.  According to
Morningstar, most of its category peers carry a very large stake
in that sector of the market.

Investment Performance

Since the Babson Shadow Stock Fund invests in out-of-favor micro-
cap stocks and holds on to them, return performance can sometimes
lag other types of funds.  But over the long run, performance has
been competitive given the level of risk it takes on.  Because it
diversifies assets across hundreds of securities, the fund's risk
level is historically been below that of other small-cap funds on
the market.

Over the trailing 10-year period through July 31 (which Maramarco
deserves partial credit), Babson Shadow Stock Fund posted a 11.8%
average annual total return for investors.  That beat the S&P 500
large-cap index by an average of 1.5% a year over that period, to
rank in the second quartile of its category (i.e. small-cap value
funds).  So, the fund's long-term results have kept pace with its
category peers and in doing so, the fund has provided added value
("alpha") over the popular S&P 500 index benchmark.

For the trailing 5-year period through August 20 (which Maramarco
deserves nearly all of the credit), the fund sports an annualized
total return of 10.0%, compared to a 0.3% annualized loss for the
S&P 500 index.  So, the Babson fund chugged along at a 10.0% clip
per year while the market as measured by the S&P 500 index failed
to produce a positive net return for investors over the same time
period.  The fund's trailing 5-year returns beat two out of three
small-cap value funds (34th percentile).





So far in 2003, the fund is up 28.1% through August 20, ranking
in the top quintile (17th percentile) of the Morningstar small-
cap value category.  That is 13.3% above the return produced by
the S&P 500 large-cap index this year.  That includes a 3-month
total return of 23.3% (8th percentile category ranking).  So it
is getting the job done for investors.

Conclusion

This unique offering has a lot to offer investors.  Maramarco's
conservative, value-driven approach doesn't always produce high
returns in the short-term, but over time, it is has produced an
average annual return of 10 percent or more for investors, with
below average relative risk.  Maramarco finds value opportunity
in stocks of small companies that are neglected by Wall Street,
proving there is more than one way to "skin a cat" so to speak.

Patient long-term investors looking to diversify their large-cap
holdings may want to have a look at the Babson Shadow Stock Fund
managed by Tony Maramarco.  Don't be fooled by the fund's 3-star
rating.  When compared to the broad universe of U.S. stock funds
it looks a whole lot better, especially if you view it on a risk
adjusted return basis.  Maramarco has added significant value in
relation to the S&P 500 large-cap index, and looks like a winner
in our books.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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The Option Investor Newsletter                 Thursday 08-21-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: STJ
Dropped Puts: None
Call Play Updates: EBAY, GILD, HIG, LLL, OMC, PCAR, SPW
New Calls Plays: BSX
Put Play Updates: None
New Put Plays: XL


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

St. Jude Medical - STJ - close: 54.01 change: +0.47 stop: 53.50

It has been uncanny seeing the way shares of STJ have been pinned
to the $54 price level for the past week, after the breakout
attempt at $56 failed so completely.  We had been hoping to see a
rebound from the 20-dma, but that didn't happen, with yesterday's
candle finally closing below that average.  Today's dip below our
stop was the final straw and despite the afternoon rebound, we're
pulling the plug.  There are plenty of better candidates out
there for us to waste our time waiting for STJ to come back to
life.

Picked on August 10th at   $54.23
Change since picked:        -0.22
Earnings Date            10/15/03 (unconfirmed)
Average Daily Volume =   2.17 mln



PUTS:
*****

None


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

eBay, Inc. - EBAY - close: 112.60 change: +2.24 stop: 109.00*new*

Wow!  We expected to see some bullish action from EBAY leading up
to its 2-for-1 split on the 29th, but this 4-day ramp higher has
been more than we had expected.  Our initial target of $110 was
tagged on Tuesday and after some consolidation near that level,
the bulls pushed the hammer down and broke solidly above that
level today.  The stock is now pushing up against the $113-115
resistance area left behind in July and our focus now turns to
protecting and maximizing gains.  After vaulting higher by more
than $10 in the past week, we obviously don't want to be
considering new entries up here.  Our ideal exit target will be
for a retest of the $115 level and if traded would be the ideal
opportunity to harvest some stellar gains.  Keep a sharp eye on
the stock as it reaches the $114 level though, as that is the
site of the downward sloping upper Bollinger band on the daily
chart, and it is likely to present some near-term resistance.  So
more conservative traders (that didn't exit near $110) should
look to exit a bit earlier if price begins to weaken near $114.
We're raising our stop to $109 tonight, just below yesterday's
intraday low.

Picked on August 12th at   $103.43
Change since picked:         +9.17
Earnings Date             10/23/03 (unconfirmed)
Average Daily Volume =    6.65 mln
Chart =


---

Gilead Sciences - GILD - cls: 66.47 chg: +1.83 stop: 62.49*new*

Our recently added call play is performing well.  Shares of GILD
have continued their rally and Thursday's close put it above
potential resistance of $66.  This was only a minor obstacle but
a victory nonetheless.  Furthermore we're happy to report that
the gain was made on better than average volume of 3.84 million
shares and that could be an accomplishment in and of itself
during these slow days of late summer.  Bolstering shares of GILD
was a strong day in the BTK biotech index.  The BTK has finally
climbed back above the 450 level and today's performance put it
above its simple 50-dma.  This is certainly a bullish move for
the group but the BTK has yet to breakout above the descending
trendline of lower highs.  Should that occur then GILD should
have the green light to retest $70.  GILD's MACD has grown much
closer to producing a new buy signal while its P&F chart has
reversed into a "low pole reversal".  The stock still looks
attractive for new entries and we're raising our stop loss to
$62.49.

Picked on August 19 at $65.32
Change since picked:    +1.15
Earnings Date        07/31/03 (confirmed)
Average Daily Volume:    3.31 million
Chart =


---

Hartford Fin. Svcs - HIG - close: 53.51 change: -0.36 stop: 51.75

Much to our chagrin, the Insurance sector (IUX.X) has been left
out of the recent broad market strength and our bullish HIG play
is stagnating just below the $54 level.  Sitting near the top of
the loser list on Thursday, the IUX shed nearly 1.5% as it was
once again rejected near the $278 resistance level.  HIG looks
like it may be starting to roll over, with daily Stochastics now
tipping down out of overbought territory and it looks like we're
going to find out whether support in the $52.00-52.50 area is as
strong as we initially thought.  That is the top of the August
7th gap, and should be reinforced by the rising 20-dma (currently
$52.37) on this pullback.  Aggressive traders can look to buy the
dip near that support, but only if the stock rebounds in concert
with the IUX index once again finding support above its 50-dma
(now at $272).  The more conservative approach will be to wait
for a breakout over resistance at $54.50.  Maintain stops at
$51.75 for now.

Picked on August 14th at    $54.14
Change since picked:         -0.63
Earnings Date             11/05/03 (unconfirmed)
Average Daily Volume =    2.60 mln
Chart =


---

L-3 Communications -LLL - cls: 50.08 chng: +0.35 stop: 48.90*new*

It's time to tighten the noose on LLL and force this stock to
either break out (as we've been expecting) or else stop us out
for a minimal loss.  The rebound back from the brink has
propelled the stock right back to strong resistance near $50, and
either the bulls will manage a solid breakout, or we'll likely be
faced with a trading range between $47-50.  Clearly, if the
latter turns out to be the case, then we want to be out of the
play sooner, rather than later.  So we're aggressively raising
our stop to $48.90 tonight, just below the converged 10-dma
($49.14) and 20-dma ($49.00).  It was somewhat encouraging to see
LLL post a higher intraday high ($50.54) today, but the pullback
from that high certainly leaves some doubts.  Traders willing to
buy dips can consider a rebound from above $49.50, but that is
definitely an aggressive approach.  Our preference would still be
to enter on a breakout to new recent highs, and now we'd suggest
waiting for a trade above $50.60.

Picked on August 3rd at    $49.90
Change since picked:        +0.18
Earnings Date            10/22/03 (unconfirmed)
Average Daily Volume =      937 K
Chart =


---

Omnicom Group - OMC - close: 76.75 chg: -0.12 stop: 72.99

The advance continues for shares of OMC as well.  The financial
media seems happy to harp on the fact that many of the major
indices are hitting new 52-week highs.  We're happy to note that
so is OMC.  It hit another new high early this morning before
pulling back to bounce near the $76 level.  Actually, glancing at
the intraday chart the bounce today looks like a move off the
bottom of its very short-term rising channel from early August.
This could be a new entry point for traders looking to take
positions.  There is no new news to report.

Picked on August 19 at $76.67
Change since picked:    +0.08
Earnings Date        07/29/03 (confirmed)
Average Daily Volume:     881 thousand
Chart =



---

PACCAR - PCAR - close: 87.00 change: +1.60 stop: 85.00 *new*

Is this a truck manufacturer?  Because its share price looks like
a rocket.  Still defying the laws of gravity, shares of PCAR tack
on another couple of points in the last two sessions.  We're
certainly not complaining.  The challenge comes with the old
saying of "letting your winners run" and placing a good stop.  Of
course we also like to adhere to the old "plan to trade and trade
your plan".  The stock has exceeded our original profit targets
so we are being very conservative with our stops and keeping them
tight.  We HIGHLY suggest that traders with profitable bullish
positions TAKE PROFITS now and sell all or part of their
position.  One look at the weekly chart of PCAR and you're bound
to get vertigo.  We do NOT suggest new bullish entries on this
play and we are raising our INTRADAY STOP LOSS to $85.00.  If you
like this stock then wait for a decent pull back and bounce, we
can always play it again.  We are setting an INTRADAY EXIT price
of $89.00.  If PCAR hits $89.00 intraday before being stopped out
we will close the play at $89.00.  The odds of another stock
split for PCAR are certainly rising.

Picked on July 31 at $77.24
Change since picked:  +9.76
Earnings Date      07/24/03 (confirmed)
Average Daily Volume:  1.15 million
Chart =



---

SPX Corporation - SPW - cls: 49.57 chng: +0.27 stop: 46.75*new*

Bit by bit, our SPW play is inching its way up to that critical
$50 resistance, as it continues to bump up against the upper
Bollinger band on the daily chart.  Daily Stochastics are now
buried in overbought territory, and we may be faced with one more
pullback to support before the elusive breakout over $50 can be
achieved.  On a pullback, look for intraday support in the
$47.50-48.00 area, which coincides nicely with the 10-dma
($47.69).  A rebound from that area is probably the best entry
setup we can hope for.  Traders looking to enter on strength will
need to wait for the trade above $50 before playing, keeping in
mind that there is significant resistance from $50 all the way up
to our initial $53 target.  That resistance makes a strong
argument for entering on the pullbacks, if we can get them.  Note
that we've raised our stop to $46.75, which is just below the 20-
dma ($46.82) that began providing support in late July.

Picked on August 14th at    $48.14
Change since picked:         +1.42
Earnings Date             10/27/03 (unconfirmed)
Average Daily Volume =       905 K
Chart =



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

Boston Scientific - BSX - cls: 66.50 chg: +1.95 stop: 61.99

Company Description:
Boston Scientific is a worldwide developer, manufacturer and
marketer of medical devices. The Company's products are used in a
broad range of interventional medical specialties. (source:
company press release)

Why We Like It:
Plenty of good news and a positive outlook have shares of BSX
significantly out performing most of the market the last couple
of years.  Fortunately, the rally does not appear to be over any
time soon.  As a matter of fact its next leg higher could be just
starting.  Since mid-June shares of BSX have struggled with
overhead resistance in the $65-66 range.  As of today, that
obstacle has been conquered.  Technical and fundamental
developments over the last few weeks have lead the way for
today's breakout.  In late July Goldman Sachs upgraded BSX to
"out perform" from "in-line" based on a number of factors and
claimed that fair value on the stock was closer to $77.  Around
the same time BSX announced it would split its stock 2-for-1
contingent on a shareholder vote to approve an increase in
authorized shares.  The vote is to take place on Oct. 6th and the
company expects the stock to split sometime in November.

Additional news out this August includes an FDA approval for
BSX's brain tumor device as well as the launch of BSX's next
generation intravascular ultrasound (IVUS) imaging system.  There
was some potentially bad news around the 13th of August when a
U.S. appeals court reversed a lower court patent case decision
against Johnson & Johnson that might leave BSX open to penalties.
However, most of Wall Street, including S&P, believe that BSX has
resources to handle the $324 million fine placed on it by a lower
court.  Given the small dip on the news and subsequent bounce in
BSX's share price it looks like investors are buying into recent
comments from Merrill Lynch that BSX could start taking market
share from JNJ in the drug-coated stent market.  That's big news
for an industry that MER believes will expand 60% to 80% in the
2nd half of this year.

Our initial profit target is $70 but we suspect BSX could drive
even higher (potentially $75).  We're going to initiate the play
at current levels with a stop at $62.00.

Suggested Options:
Bullish traders can choose from September, October and November
calls on BSX.  Our preference is for the September 65s and 70s or
the October 70s (we'd probably lean towards the Octobers).

BUY CALL SEP 65 BSX-IM OI=30772 at $4.30 SL=2.25
BUY CALL SEP 70 BSX-IN OI=15293 at $1.90 SL=1.00
BUY CALL OCT 70 BSX-JN OI=  164 at $3.00 SL=1.65
BUY CALL NOV 70 BSX-KN OI= 2231 at $4.20 SL=2.25

Annotated Chart:




Picked on August 21 at $66.50
Change since picked:    +0.00
Earnings Date        07/22/03 (confirmed)
Average Daily Volume:    2.78 million
Chart =



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

None


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

XL Capital Ltd. - XL - close: 75.92 change: -0.96 stop: 80.00

Company Description:
XL Capital Ltd. provides insurance and reinsurance coverages and
financial products and services to industrial, commercial and
professional service firms, insurance companies and other
enterprises on a worldwide basis.  Insurance business written
includes general liability, other liability, professional and
employment practices liability, environmental liability,
property, program business, marine and energy, aviation and
satellite, as well as other product lines.  Reinsurance business
written includes treaty and facultative reinsurance to primary
insurers of casualty and property risks, as well as life
reinsurance, primarily European term assurances, group life,
critical illness coverage , immediate annuities in payment and
disability income business.

Why we like it:
We played the downside in shares of XL last month, but had to let
it go prematurely due to the company's earnings report.  There
has been a fair amount of volatility in the stock since that
announcement, but in the past couple weeks, things have settled
down again and the stock has resumed its downtrend.  Closing back
under $76 on Thursday with volume starting to pick up again, XL
looks like it is ready to make another run at significantly lower
levels.  While there is some mild support at the 8/01 low near
$75, the first serious support will likely be found in the
$72.50-73.50 area, the site of the early April gap.  That may
produce a near-term bounce, but we're looking for XL to work its
way down to stronger support near $70 as rising bond yields
continue to exert downward pressure on the entire Financial
sector.  Turning to the PnF chart, we can see a very clear
picture of weakness, with the July Sell signal giving us a
bearish vertical count of $65.  Interestingly, that corresponds
to the bottom found in March.  Another possible target is $67,
which happens to be the site of the ascending trendline
connecting the July 2002 and March 2003 lows.

After two failed attempts to regain the $80 level in the past
month, that looks like rock-solid resistance, giving us an a
favorable level to place our stop.  Looking at the chart below,
you can see that the descending trendline from the June highs
currently crosses right at $78, and that will be reinforced by
the 200-dma (currently $78.53).  Aggressive traders can use a
failed rally below this resistance area to initiate new
positions, targeting an initial drop to the site of that April
gap.  More conservative traders will want to wait for a break
below $75 before playing.  Note that the stock has been trying to
decisively break its bearish resistance line, which is currently
at $75.  Once XL breaks below that level, we should be able to
safely trail our stop just above that descending trendline.  Our
initial target will be $70, but we'll keep open the possibility
that the bears could get carried away, allowing us to enjoy a
ride down to those secondary support levels at $67 and then $65.

Suggested Options:
Aggressive short-term traders will want to focus on the August 75
Put, as it will provide the best return for a short-term play.
Traders with a more conservative approach will want to utilize
the October contract, as it should not be as susceptible to time
decay issues in the near term.

BUY PUT SEP-80 XL -UP OI= 375 at $5.70 SL=3.75
BUY PUT SEP-75 XL -UO OI= 152 at $1.75 SL=0.75
BUY PUT OCT-75 XL -VO OI= 297 at $2.95 SL=1.50

Annotated Chart of XL:




Picked on August 21st at   $75.92
Change since picked:        +0.00
Earnings Date            10/30/03 (unconfirmed)
Average Daily Volume =      814 K
Chart =



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

Please read our disclaimer at:



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

For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support
The Option Investor Newsletter                 Thursday 08-21-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: CALL - BSX
Traders Corner: And He Said, "Let There Be Light" – Not Bud Lite
Traders Corner: More on Market Cycles Than You Ever Wanted to Know.


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

Boston Scientific - BSX - cls: 66.50 chg: +1.95 stop: 61.99

Company Description:
Boston Scientific is a worldwide developer, manufacturer and
marketer of medical devices. The Company's products are used in a
broad range of interventional medical specialties. (source:
company press release)

Why We Like It:
Plenty of good news and a positive outlook have shares of BSX
significantly out performing most of the market the last couple
of years.  Fortunately, the rally does not appear to be over any
time soon.  As a matter of fact its next leg higher could be just
starting.  Since mid-June shares of BSX have struggled with
overhead resistance in the $65-66 range.  As of today, that
obstacle has been conquered.  Technical and fundamental
developments over the last few weeks have lead the way for
today's breakout.  In late July Goldman Sachs upgraded BSX to
"out perform" from "in-line" based on a number of factors and
claimed that fair value on the stock was closer to $77.  Around
the same time BSX announced it would split its stock 2-for-1
contingent on a shareholder vote to approve an increase in
authorized shares.  The vote is to take place on Oct. 6th and the
company expects the stock to split sometime in November.

Additional news out this August includes an FDA approval for
BSX's brain tumor device as well as the launch of BSX's next
generation intravascular ultrasound (IVUS) imaging system.  There
was some potentially bad news around the 13th of August when a
U.S. appeals court reversed a lower court patent case decision
against Johnson & Johnson that might leave BSX open to penalties.
However, most of Wall Street, including S&P, believe that BSX has
resources to handle the $324 million fine placed on it by a lower
court.  Given the small dip on the news and subsequent bounce in
BSX's share price it looks like investors are buying into recent
comments from Merrill Lynch that BSX could start taking market
share from JNJ in the drug-coated stent market.  That's big news
for an industry that MER believes will expand 60% to 80% in the
2nd half of this year.

Our initial profit target is $70 but we suspect BSX could drive
even higher (potentially $75).  We're going to initiate the play
at current levels with a stop at $62.00.

Suggested Options:
Bullish traders can choose from September, October and November
calls on BSX.  Our preference is for the September 65s and 70s or
the October 70s (we'd probably lean towards the Octobers).

BUY CALL SEP 65 BSX-IM OI=30772 at $4.30 SL=2.25
BUY CALL SEP 70 BSX-IN OI=15293 at $1.90 SL=1.00
BUY CALL OCT 70 BSX-JN OI=  164 at $3.00 SL=1.65
BUY CALL NOV 70 BSX-KN OI= 2231 at $4.20 SL=2.25

Annotated Chart:




Picked on August 21 at $66.50
Change since picked:    +0.00
Earnings Date        07/22/03 (confirmed)
Average Daily Volume:    2.78 million
Chart =



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And He Said, "Let There Be Light" – Not Bud Lite

By Mike Parnos, Investing With Attitude

I'm still recuperating from the blackout.  Nothing serious, mind
you.  There's is, however, a mourning period for the unsuspecting
victims.  Four sirloin steaks, five pounds of ground chuck, a
half-gallon of milk, and two pounds of artificial crabmeat are no
longer with us.  They were taken away in a waste management truck
– as I shed a tear or two.

Oh well, maybe they're in a better place.  But then, what better
place is there than my tummy?

The Market
Stock trading didn't seem overly concerned about the blackout.
But, they didn't lose $50 of meat.  Come to think of it, I've been
known to do some of my best work in the dark.  Actually, all the
charts look pretty good with no electricity.  Hell, even I look
good with the lights off.  Hmmm.  I wonder if they have a Braille
charting service?

Meanwhile, our CPTI (Couch Potato Trading Institute) portfolios
often include the use of the Iron Condor strategy.  Since this is
a favorite strategy, it's the source of many reader questions.
Let's see if we can bring a few students out of the dark and into
the light.
_________________________________________________________________

Mike,
Thanks for all the great trade ideas. Of all the top-notch folks
at OptionInvestor, you definitely rate at the top from what I can
see after reading your articles and trade suggestions over the
last year or so!!

Regarding my question, I really like doing credit spreads on the
OEX, one month out at a time, and have found that rarely does this
index cross it's 200 DMA except for normally only once or twice a
year.  Of course, normally a small profit is obtained because the
spread is usually way out of the money when placed below (or above
earlier this year) the OEX 200 DMA.

The problem I encounter regards that once or twice a year when a
crossover occurs (last April I believe was the last time), the
loss can easily exceed the small monthly profits from most other
months.  Do you have an exit strategy, or perhaps have an opinion
on how a hedge might be placed to protect against those few months
of perhaps substantial loss?  Is perhaps picking a stock such as
GE and purchasing a leap, a possible alternative??  Your thoughts
would be greatly appreciated!  Once again thanks for your many
valued articles.

Response:
This is a tough question.  Hedging an OEX spread is particularly
tough.  Their options only go out to December and they're
expensive as hell.  To protect a bear call spread, you could buy a
Dec. 500 call for about $21 and then sell a Dec. 540 call for
about $6 and have a debit of $15.  If, by Dec., the OEX is over
540, you would have made $25.  However, you would have to have a
bullish outlook on the OEX.  By buying back and reselling the
short calls on this calendar spread, you could be making some
additional money each month -- meanwhile having your bear call
spread hedged.

For example, you believe that the markets will ultimately move
higher in by the end of this year (the OEX doesn't have LEAPS),
and you've sold an OEX near term bear-call spread.  As a hedge,
you could buy a December OEX 500 call for about $21.00

An Exit Strategy:
First, since your OEX credit spreads are generally far out of the
money, the market would have to make a dramatic move -- which
means it has begun a trend (however short).  When your short
strike is threatened -- or if the index is rapidly headed in that
direction, you could protect yourself by selling credit spreads in
the opposite direction.

For example, you sold the OEX 460/455 bull-put spread and the OEX
begins to drop significantly.  With OEX at 470, you could initiate
a bear-call spread at 480 or 485 and take in some additional
premium.  Maybe you'd want to sell two bear-call spreads for every
bull put spread.

Let's say you originally took in $1.00 with 10 contracts of the
460/455 bull-put spread.  Then, you could conceivably sell 20
contracts of the 480/485 bear-call spread and take in $1.00.
Should OEX break below support at 460, this premium will provide
an extra cushion.  You will have taken in $3.00, thereby further
reducing your exposure.  If the OEX holds its 460 support, then
you could have profits at both ends if the OEX finishes between
460 and 480.  It's sort of like establishing an Iron Condor, one
leg at a time.

If the market reverses again, you can sell additional bull-put
spreads to take in more premium.  Also, a lot depends on when
these moves take place -- at what time during the life of the
spread.  That will determine how much time premium remains, which
in turn, will determine where you can sell additional spreads.

You will need to be somewhat nimble and pay close attention to
potential support and resistance levels -- placing bear call
spreads slightly above resistance levels and bull put spreads
below support levels.  I know this is not always possible, but
you'd be surprised how many times it works out.

_____________________________________________________________

NEW SEPTEMBER POSITIONS – Remember that September is a five-week
option cycle.

September Position #1 – SPX Iron Condor – SPX @ 1003.27
S & P 500 Index = SPX
Sell 10 contracts of SPX 1040 Sept. calls
Buy 10 contracts of SPX 1050 Sept. calls
Look for a net credit of $1.30.
Sell 10 contracts of the SPX 950 Sept. puts
Buy 10 contracts of the SPX Sept. 940 puts
Look for a net credit of $1.40
Total credit of $2.70 ($2,700).  We have a huge maximum profit
range of 950 to 1040.  That's peace of mind!  More aggressive
investors can narrow the range a bit and take in more money.   At
1003.27, we're in good shape – for now.

September Position #2 – SMH Sell Straddle
Semiconductor Holders Trust = SMH
As so many astute CPTI students pointed out, the premiums I listed
here on Sunday were unrealistic.  Well, I checked and, indeed, it
was too good to be true.  I had grabbed the November premiums
instead of the September premiums.  Picky, picky, picky.  So, the
SMH trade became null and void – and not worth pursuing.

September Position #3 – COF Sell Straddle – COF @ $51.40
Capitol One Financial = COF
Sell 10 contracts of COF Sept. $50 calls @ $2.35
Sell 10 contracts of COT Sept. $50 puts @ $2.50
Total credit of $4.85 ($4,850).  We will make some profit if COF
finishes anywhere between $45.15 and $54.85.  The closer COF
finishes to $50, the more money we'll make.  Our bailout points
are the parameters of our profit range.  Maximum potential profit
is, again, $4,850.  COF moved up a bit, but at $51.40 we're still
comfortably in profit territory.

September Position #4 – EBAY Iron Condor  -- EBAY
We were going to sell 10 contracts of the EBAY Sept. $95 puts @
$1.20
and buy 10 contracts of the EBAY Sept. $90 puts @ $.65, taking in
a net credit of $.55.  Then, we were going to sell 10 contracts of
the EBAY Sept. $110 calls @ $1.35 and buy 10 contracts of the EBAY
Sept. $115 calls @ $.60 for a net credit of $.75.  The total
credit would have been $1.30 ($1,300).  Exposure of $3.70.
Maximum profit range of $35 to $45.  Potential maximum profit
would have been $1,300.

EBAY gapped way up early in Monday's trading session.  That
changed the scheme of things and it was not prudent to enter the
EBAY trade.  If EBAY would have retreated back down to the $103
level, we might have entered the trade, but it did not.   It was a
wise choice since EBAY has continued on up to $112 and we would
have been in a precarious position.
______________________________________________________________

Replacement Positions
Since the SMH and EBAY positions did not materialize – for one
reason or another – we'll try to come up with a replacement
position (or two) in Sunday's OI column.
______________________________________________________________

More Words Of Wisdom
It seems that our CPTI students are full of it – wisdom, of
course.   Here are some of this week's submissions.  Keep 'em
coming.

1. Do not walk behind me, for I may not lead. Do not walk ahead of
me, for I may not follow. Do not walk beside me either. Just
pretty much leave me alone.
2. If at first you don't succeed, skydiving is not for you.
3. There are two theories to arguing with women. Neither one
works.
4. Never, under any circumstances, take a sleeping pill and a
laxative on the same night.
_____________________________________________________________

New To The CPTI?
Are you a new Couch Potato Trading Institute student?  Do you have
questions about our plays or our strategies?  Feel free to email
me your questions.  An excellent source for new students is the
OptionInvestor archives where we've been discussing strategies and
answering questions since July, 2002.  To find past CPTI (Mike
Parnos) articles, look under "Education" and click on "Traders
Corner."  They're waiting for you 24/7
______________________________________________________________

Happy Trading!
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In
trading, as in life, it’s not the cards we’re dealt. It’s how we
play them.

Your questions and comments are always welcome.
Mike Parnos
CPTI Master Strategist and HCP


**************
TRADERS CORNER
**************

More on Market Cycles Than You Ever Wanted to Know.

Jane Fox

A couple of weeks ago I mentioned in the Market Monitor that I
had written an article on Secular and Cyclic markets. Many
subscribers requested the article and subsequently asked some
excellent questions about market cycles. Rather than answer each
and every one I decided to do a more in-depth study of the
subject and post it on the OIN website.

Secular Markets

Mike Alexander, author of Stock Cycles gives a definition of
secular markets as: "The secular trend concept holds that the
long-term rise in stock prices displays a "stair-step" pattern.
During the secular bull markets (corresponding to the riser)
stocks move strongly upward, averaging a 13-14% return in real
terms. During the secular bear markets (corresponding to the
step) stocks move basically sideways, averaging close to no
return in real terms. The market spends roughly equal amounts of
time, in 10-20 year blocks, in each kind of secular market
trend." As a point of reference, the average secular bull market
lasts for 14.71 years while the average duration for a secular
bear market is 13.57 years.

Basic secular market observations:

1. The duration of each secular market can last for 10 - 20 years
2. Secular markets alternate from bullish to bearish and back
again.
3. Secular bear markets may take on two possible forms.
i. The first is a massive decline followed by a slow
recovery. An example of this type of secular bear market
would be the 1929-1949 market experienced in U.S. equities.
Another example would be the secular bear market currently
underway in the Nikkei. The current U.S. equity market has
had a massive decline but it remains to be seen if it is
followed by a slow recovery. So far, all signals point to
this happening in this current secular bear market also.

ii. The second secular bear market style falls into the
volatile sideways trading range category. The 1966-1982
secular bear market fits this format. (The charts to follow
will bear this out)
4. Secular bull markets can be extremely strong and profitable
where a passive buy-and-hold strategy may work well.

Cyclical Markets

A cyclical market refers to a bullish or bearish trend within the
major secular trend. These minor or cyclical trends are short to
intermediate in time usually lasting from 3 - 34 months. At the
conclusion of the cyclical period the directional bias of the
longer-term secular phase is reestablished. It is not uncommon
for the market to experience sizable cyclical phases counter to
the major secular trend.

Here is a spreadsheet of the Dow's secular markets since 1929, a
74-year span. I then broke each secular market down into its
respective cyclical markets.




1929-1949 Secular Bear Market

The first secular bear we have noted in the above chart started
in 1929 and lasted for 20 years. Within that time frame there
were 7 major cyclical phases from bear to bull and back to bear.
The total return in these 20 years was -56.05%, annualized -
4.06%.

Lets take a look at the bear/bull cyclical markets on a
spreadsheet then look at the chart.










1949-1966 Secular Bull Market

The next secular market was a bull that started in June 1949 and
lasted until January 1966, 16.5 years. Within that time frame there
were 9 major cyclical bull and bear markets. The total return in
these 16.5 years was +488%, annualized +11.28%.

Lets take a look at the bear/bull cyclical markets on a
spreadsheet then look at the chart.





Notice how short the cyclical bear markets are in this bull
secular market.





1966-1982 Secular Bear Market

The next secular bear market started in January 1966 and lasted
until July 1982, 16.5 years. Within that time frame there were 9
major cyclical bull and bear markets. The total return in these
16.5 years was -17.08%, annualized -1.18%.

Lets take a look at the bear/bull cyclical markets on a
spreadsheet then look at the chart.





Here is an example of the second type of secular bear market
mentioned earlier, the volatile sideways trading range category.





1982-2000 Secular Bull Market

The next secular bull market started in July 1982 and lasted
until January 2000, 17.50 years. Within that time frame there
were 7 major cyclical bull and bear markets. The total return in
these 17.50 years was a whopping +1388%, annualized +16.47%. A
buy and hold strategy worked well in this secular phase.

Lets take a look at the bear/bull cyclical markets on a
spreadsheet then look at the chart.





Once again notice how short the cyclical bear markets are in this
bull secular market.





When you compare all the charts you get a picture of how spoiled
we were from 1982-2000. The bull markets were ferocious and the
bear markets almost none existent.

Here is a ranking of the 17 cyclical bear markets that have taken
place in the DJIA since 1929. All results are based on month-end data.





The recent cyclical bear phase (January 2000 - October 2002) is
the fifth largest bear phase since 1929, has an above average
peak-to-valley duration in comparison with all bear phases and is
still in the midst of a full recovery as of August 2003 (3.5+
years and counting). I fear this full recovery duration could
rival the worst bear phase we have seen in the last 74 years, the
one from August 1929 to June 1932.

Where we stand today

Although this secular bear is in the early stages, the Dow has
completed one cyclical bear phase losing 34% over a 2.75 years
period from January 2000 - October 2002. Since this time the Dow
has entered a new cyclical bull phase, which is still under way.
History is currently being written, so it will take time to
measure the full extent of this secular bear market in terms of
both magnitude and duration.

Remember plan your trade and trade your plan.

Jane Fox


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