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Daily Newsletter, Monday, 05/24/2004

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The Option Investor Newsletter                   Monday 05-24-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Stocks Slide Sideways as Oil Rises
Futures Wrap: See Note
Index Trader Wrap: Broad gains on light volume


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     05-24-2004            High     Low     Volume Advance/Decline
DJIA     9958.43 -  8.31 10045.45  9927.14 1.41 bln   2060/ 780
NASDAQ   1922.98 + 10.89  1934.41  1915.56 1.40 bln   1883/1139
S&P 100   534.04 -  0.29   538.02   532.62   Totals   3943/1919
S&P 500  1095.42 +  1.85  1101.71  1091.77
RUS 2000  551.72 +  5.91   552.76   545.81
DJ TRANS 2865.36 +  3.61  2889.51  2854.86
VIX        18.08 -  0.41    18.82    17.96
VXO        18.31 -  0.85    18.97    18.05
VXN        24.33 -  0.57    25.58    24.26
Total Volume 3,205M
Total UpVol  2,175M
Total DnVol    967M
52wk Highs     104
52wk Lows      130
TRIN          0.87
PUT/CALL      0.77
*******************************************************************

Stocks Slide Sideways as Oil Rises
by James Brown

Monday turned out to be a relatively quiet session.  The lack of
any decision from the OPEC meeting could have pushed the market
lower but news that Saudi Arabia would volunteer to raise
production lent the stock market early strength.  The Dow
Industrials opened strongly and quickly traded to 10,045.  The
NASDAQ gapped open and rushed to 1934 but these would prove to be
the high for the day.  The rally faded into the lunchtime lull
before bulls managed a meager afternoon rally into the close.
The Industrials ended the session down 8 points while the NASDAQ
closed up almost 11 points.

Action overseas was mixed.  The Japanese NIKKEI stepped up 31
points to 11,101 while the Chinese Hang Seng added 86 to 11,662.
The German DAX lost 36 points to close at 3867.  The English FTSE
slipped 2.5 points to 4428.  Meanwhile the French CAC added 21 to
end at 3628.

Here at home the sector-specific averages showed a much more
bullish front with only the DRG drug index and the IUX insurance
ending in the red. Energy stocks were Monday's best performers.
The OSX oil services index gushed +4.38%.  The XNG natural gas
index rose +2.31% and the OIX oil index added nearly 2%.  Gold's
XAU index turned in a solid day with a 1.37% gain and the
homebuilders rallied 3.2% to breakout over resistance at the 560
level.

Monday's market internals support the widespread drift higher
with advancing issues outnumbering decliners 5 to 2 on the NYSE
and 18 to 11 on the NASDAQ. Up volume overshadowed down volume
with 866 million to 393 million on the NYSE and 942 million to
461 million on the NASDAQ.  Overall volume was extremely light.

Chart of the Dow Industrials:



Chart of the NASDAQ composite:



Over the weekend investors were listening for news out of the
OPEC and G7 meetings.  The world's seven top economic powers met
at the G7 meeting and unanimously agreed that oil prices needed
to come down to support the world economy.  As a group they asked
OPEC to increase production.  Unfortunately, OPEC wasn't
listening.  The oil cartel's informal meeting in Amsterdam over
the weekend failed to produce any decisions even though all the
members agreed that crude prices are too high.  Only Saudi, the
cartel's largest and most influential member, said they would
boost production.  The Saudis said they would raise production
from 7.1 million to 9.1 million barrels per day starting in June.
Furthermore Saudi said they'd be willing to ramp up to 10.5
million a day if necessary.

This was obviously welcome news and one would have expected the
price of oil to drop on the announcement.  Not so!  Crude oil
prices rose 4.5% to close at $41.72 a barrel.  This is an all-
time high.  The markets are essentially stating their belief that
Saudi alone cannot keep up with global demand.  Plus, we have to
deal with growing risks to the oil infrastructure.  Just this
weekend there were three closures.  A pipeline in Washington
State was closed due to a fire.  The Mars oil platform, located
in the Gulf of Mexico, was closed due to an oil spill.  Third,
there were a couple of news agencies reporting that Iraq's
northern pipeline was shut down due to another terrorist bombing.

OPEC will get another chance to vote on oil production at the
formal June 3rd meeting in Beirut.  However, even if the
remaining cartel members decide to join Saudi Arabia and boost
production we probably won't see any benefit in time to save us
from record high gas prices during this summer's driving season.
Thus, energy prices will remain a drag on our own economic
rebound.

Monday's second biggest story was the legal defeat for the
tobacco industry.  Altria Group (MO), parent of Phillip Morris,
and the rest of the tobacco stocks were hit hard today after
federal judge Gladys Kessler decline to limit the amount of fines
the government might be able to impose in the upcoming trial set
to begin in September.  Right now government prosecutors are
seeking a disgorgement of profits to the tune of $280 billion.
Prosecutors claim that MO and the rest of the industry defrauded
smokers by lying about the health risks and by marketing their
product to kids who became addicted.  The decision today is the
fourth legal defeat for the tobacco industry in two weeks.
Shares of MO dropped 8.86% to $44.95.  RJR fell 6.16%.  CG lost
2.99%.

Mitigating MO's affect on the Dow Industrials were positive moves
in Alcoa, Boeing and Caterpillar.  Alcoa (AA) rose 2.44% to
$30.20 after news broke that the company plans to open a smelting
operation in Trinidad.  Boeing (BA) jumped 2.67% to $44.56 after
CSFB upgraded the stock to an "outperform" and raised its price
target to $52 on positive expectations for BA's new 7E7 line of
aircraft.  Caterpillar (CAT) climbed 1.32% to $74 after Merrill
Lynch upgraded the stock from a "neutral" to a "buy" with a long-
term price target of $102.

It wouldn't be a Monday without some merger news.  Today's big
merger hails from the drug sector.  Omnicare (OCR), a
prescription drug provider to nursing homes, added 3.7% by the
close after announcing a $1.5 billion unsolicited offer to buy
NeighborCare (NCRX) for $30 a share.  Normally the acquirer's
stock price goes down when such deals are announced.  To see
OCR's price rise on the news means the street would strongly
approve of the union.  Shares of NCRX jumped 54% to $27.19 and
the company said they are considering the offer.  The second M&A
announcement today came from Denver-based Forest Oil Corp (FST).
FST said it would pay $330 million for Wiser Oil Co (WZR).  The
deal values WZR AT $10.60 per share.

Looking ahead to tomorrow Wall Street will continue to focus on
the oil issue since the record high gasoline prices undermines
our own GDP growth.  Plus, the markets will have a chance to
react to the President's speech on Iraq tonight at 8:00 PM ET.
Tomorrow also brings the Consumer Confidence numbers and the
Existing home sales report.  If Bush doesn't drop any more word
bombs and the consumer confidence numbers come in reasonably well
I'm cautiously optimistic for a positive day tomorrow.  I don't
expect any big moves in the Dow but I'm encouraged by what I see
in many of the smaller sector-specific indices.


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

Futures wrap is not emailed due to the excessive number of charts.
It may be read on the website at this address.
http://www.OptionInvestor.com/indexes/futureswrap.asp


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

Broad gains on light volume

Sectors traded broadly higher where crude oil closed above $41.50
and sparked renewed interest in oil service stocks, while the
Pharmaceutical Index (DRG.X) 323.72 -0.78% was today's loan
sector loser on concern of increased competition on blockbuster
drugs and the reimportation issue.

A late spat of volume buying kept the major indices unchanged to
fractionally higher with the NYSE turning a modest 1.22 billion
shares, while NASDAQ volume struggled to reach 1.4 billion.

Advancers outnumbered decliners by a 23 to 9 margin at the big
board, while NASDAQ breadth was positive at 2:1.

U.S. Market Watch - 05/24/04 Close



Sector action was broadly higher today, with the Oil Service
Index (OSX.X) 100.06 +4.38%, which was down more that 9% the past
month, despite higher energy price getting a lift on thought that
while Saudi Arabia wants OPEC to raise production at its June 3
meeting, industry analysts say the production increase of 2
million barrels per day would have to come largely from Saudi
Arabia, as most other countries are running at full capacity.
Oil service stocks jumped on thought that to increase
capacity/production, the services would play the bigger role and
benefit most.

The Oil Service HOLDRs (AMEX:OSH) $67.19 +4.46% have not tested
their slowly trending higher 200-day SMA at $63.41, and today's
session high came just shy of a falling 21-day SMA ($67.75).

Homebuilders as depicted by the Dow Jones Home Construction Index
(DJUSHB) 564.94 +3.2% gained as Treasuries found evenly
distributed buying across the major maturities.

Wednesday morning, homebuilder Toll Borthers (NYSE:TOL) $39.08
+2.57% is scheduled to report quarterly earnings per share of
$0.88 versus year-ago EPS of $0.72.

Pivot Matrix -



The WEEKLY S2-R2 would suggest another rather tight range of
trade this week.  While not showing overly impressive strength,
the NDX/QQQ have been stronger in MONTHLY/WEEKLY Pivots of late
and new highs from RIMMM and YHOO show some bullish leadership
from aggressive growth.

S&P 500 Index (SPX.X) - 10 and 5-point box



The broad S&P 500 Index (SPX.X) 1,095.41 +0.16% gained 1.85
points in today's trade.  On May 10, the SPX's PnF chart
generated a double bottom sell signal at 1,080 and for the most
part, has been little-moved since.  For the current bearish
vertical count to be completed, a 3-box reversal back higher (30-
points) to 1,110 is needed.

S&P 100 Index (OEX.X) Chart - Daily Intervals



Other than a potential bounce, which I feel could only come from
some type of decline in oil prices, I don't see a catalyst for a
bounce to have traders overly eager to be buying call options on
the OEX at this point.  I'd rate sentiment skewed negative on
Iraq and terrorism until the June 30 deadline for turning over
sovereignty to Iraq, and by that time, and OPEC production
increases might have started to begin trickling through to energy
prices.  Meanwhile, technical remain bearish, and depending on
how things go in the Middle East after the June 30 deadline,
uncertainty over who will be the favorite for President of the
U.S. creates policy uncertainty here at home.

Today, Lehman Brothers commented that current market analysis
would have the markets leaning toward the thought of a Kerry
victory with annuity oriented insurers, homebuilders, banks and
retailers catering to the middle-class showing some relative
strength versus while a Bush re-election would most likely
benefit sectors like the pharmaceuticals, health service
providers, energy drillers, utilities, autos and financial asset
managers as well as property/casualty insurers and higher-end
retailers.

The one sector that I would note weakness in of late has been the
Pharmaceutical Index ($DRG.X) 323.72 -0.78%, which fell and
closed back below its 200-day SMA (325.27).

Lehman Brothers confessed that they see a very tight race in this
year's election, and I (Jeff Bailey) would have to agree.  While
the economic recovery will help Bush, its the current situation
in Iraq which I think has the Bush re-election in doubt.

Dow Industrials (INDU) Chart - Daily Intervals



The Dow Industrials (INDU) has been trapped in a 300-point range
the past two weeks.  Breadth was even at 15:15 today, but a
judges denial of a pre-trial motion by U.S. tobacco companies to
disallow the government's $280 billion disgorgement claim (claim
against past profits) in the Justice Department's lawsuit
scheduled for trial in September weighed heavily on component
Altria (NYSE:MO) $44.95 -8.18% and offset gains in Alcoa
(NYSE:AA) $30.20 +2.44%, Disney (NYSE:DIS) $23.20 +2.29% and
General Motors (NYSE:GM) $43.77 +1.60%.

NASDAQ-100 Tracker (QQQ) - Daily Intervals



New 52-week highs for Research in Motion (NASDAQ:RIMM) $114.47
+4.99% and Yahoo! Inc. (NASDAQ:YHOO) $29.36 +2.83% come on new
product developments.  While current valuations may seem
stretched, buy side analysts say proven business models and
exciting new technologies allow for growth which can outpace
current uncertainty regarding inflation until Fed raises rates.
Yahoo! (YHOO) benefited from the Interactive Advertising Bureau
saying Internet advertising revenue reached about $2.3 billion in
the first quarter of 2004, a record for a single quarter and is
the latest sign the industry is poised this year to surpass it
bubble-peak era.

Jeff Bailey


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The Option Investor Newsletter                   Monday 05-24-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: None
Dropped Calls: None
Dropped Puts: None
Watch List:


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

Lack of Conviction

FLIR Systems Inc. - FLIR - close: 48.88 change: +0.97

WHAT TO WATCH: After pulling back to find support near $44, shares
of FLIR have been steadily working their way higher over the past
couple weeks and a test of the late April highs appears likely.  A
breakout over the $50 level should generate another wave of buying
up to the $55 area.  Use a trigger at $50.

Chart=


---

Research In Motion Ltd. - RIMM - close: 114.47 change: +5.45

WHAT TO WATCH: It's hard to believe, but the bulls have been very
active in RIMM today, as the stock gapped open to new highs and
just continued rising from there, gaining more than 5% on the day.
Given the strength of the rise over the past week, this is a very
aggressive play.  But a pullback to test support near $110 would
provide a favorable entry, looking for a continued run towards the
$120 level.

Chart=


---

eBay Inc. - EBAY - close: 82.11 change: +1.77

WHAT TO WATCH: It seems nothing can dampen the spirits of EBAY
investors, as the recent drop and PnF Sell signal once again
prompted the buyers to hit the buy button and the stock is soaring
once again, pushing over the $82 level today and taking out the
past two weeks of resistance on strong volume.  A trade at $84
will put the stock back on a PnF Buy signal (with a target of $99)
and could be used as a trigger for new entries.  More conservative
traders would want to wait for a move through the $84.75 April
high before playing.

Chart=


---

Altria Group Inc. - MO - close: 44.95 change: -4.37

WHAT TO WATCH: After breaking the 200-dma a couple weeks ago,
shares of MO had been trying to find support in the $48-50 area.
That all got shot out of the water this morning though, as the
stock plunged through support, not finding any solace until
reaching the $45 area.  With volume running heavy again today,
we're looking for more weakness ahead.  Look for a break below
today's low to offer aggressive momentum entries, targeting a
decline to fill that September 2003 gap down just over $40

Chart=


---


===================
On the RADAR Screen
===================

AHC $72.14 - Despite the OPEC meeting, the price of crude oil went
out at new highs and shares of AHC put in another impressive
bounce, this time from the 30-dma.  Will this be the one that
sticks and sees the stock surge to new recent highs?  Obviously we
can't know, but a breakout over $75 looks like a good momentum
entry.

AET $77.85 - We looked at shares of AET last week on the idea that
its bear flag was about to break down.  That has already occurred,
but the stock is holding just above the early May lows.  The break
of the flag pattern didn't generate much in the way of downside
follow-through, but we're betting a break of the $76.75 level
will.  Target a move first to the bottom of the February gap near
$72.50 and then for a test of the 200-dma near $70.

ASD $110.18 - After stabilizing just below resistance, shares of
ASD got a strong upward push this morning, driving price through
resistance near $109, as well as the 50dma.  This looks like a
breakout with some fuel behind it, and a run back to the early
April highs seems likely.  A pullback entry near the $109 level
would be a gift, but there's nothing wrong with entering on
continued strength above today's high.  Target a rally back near
$115, but watch for near-term resistance at $11.50, near the top
of the April gap.


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If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is $49.95. The quarterly
price is $129.95 which is $20 off the monthly rate.

We would like to have you as a subscriber. You mar
subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you mar go to our website at

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and click on "subscribe" to use our secure credit
card server or you mar simply send an email to

 "Contact Support"

with your credit card information,(number, exp date, name)
or you mar call us at 303-797-0200 and give us the
information over the phone.

You mar also fax the information to: 303-797-1333


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

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