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Daily Newsletter, Tuesday, 07/06/2004

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The Option Investor Newsletter                 Tuesday 07-06-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Earnings Surprise
Index Trader Wrap: Pre-announcement season begins with a slam
Market Sentiment: Investors Turn Wary


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      07-06-2004           High     Low     Volume   Adv/Dcl
DJIA    10219.34 - 63.50 10280.26 10191.40 1.46 bln 1192/1932
NASDAQ   1963.43 - 43.20  1995.40  1958.69 1.89 bln  784/2273
S&P 100   543.33 -  3.84   547.17   541.76   Totals 1976/4205
S&P 500  1116.19 -  9.19  1125.38  1113.21
W5000   10896.09 -101.50 10997.55 10870.11
SOX       439.14 - 18.31   457.31   435.23
RUS 2000  572.41 - 10.31   582.72   571.47
DJ TRANS 3116.49 - 29.70  3146.39  3113.91
VIX        16.25 +  1.17    16.75    16.13
VXO (VIX-O)16.17 +  1.08    16.94    15.55
VXN        22.11 +  2.22    22.38    21.41
Total Volume 3,653M
Total UpVol    488M
Total DnVol  3,126M
Total Adv  2229
Total Dcl  4747
52wk Highs  145
52wk Lows   140
TRIN       2.45
NAZTRIN    3.76
PUT/CALL   1.08
************************************************************

Earnings Surprise
by Jim Brown

The market reacted strongly to the continued flurry of
earnings warnings and definitely surprised traders. The
constant drone of company after company warning that
large corporations are not spending money has soured
expectations and traders took their wrath out on stocks.

Dow Chart - Daily


Nasdaq Chart - Daily


SOX Chart - Daily



The past has come back to haunt us as earnings and
economics continue to deteriorate. Both are slipping
from their highs from the last couple quarters and are
still well above crisis levels but traders always want
more. The ISM Services this morning dropped to 59.9 from
65.2 in May and was well under consensus estimates of
63.0. The internal components showed mostly gains with
New Orders, Deliveries, Employment and Exports continuing
to rise. Imports shrank to 56.5 from 59.5. Problem areas
were a +3.5 jump in inventory levels to 57.5 and the
highest Prices Paid component since records were started
in 1997. The mixed message of a new high in employment
and a new high in prices paid was even more confusing
with the substantial drop in the headline number. This
was the first drop under 60 in six months and at 59 it
is still well into expansion territory. Analysts claim
the dip is a lag caused by higher energy prices and the
argument sounds reasonable to me. Next month will be
a critical indicator if the decline from 68.4 in April
extends to a third month.

The only other economic number was the Challenger Layoff
Report and the news was good. Layoffs in June dropped to
64,343 and nearly -10,000 below May. This was the lowest
level for the year and compares to June's -59,715 from
last year which was also the lowest for 2003. This is
a seasonal trend where layoffs decline in late spring,
early summer and then rise again in the fall. Do not
be surprised if we see this number begin to rise next
month. YTD announced layoffs are down -25% compared to
2003 and that is definitely a good sign. Unfortunately
planned hiring declined to only 38,377 from May's
55,307. The sudden increase in earnings warnings will
put the need to cut expenses right back in the forefront
and cutting employees produces strong permanent cost
reductions.

The mixed economics did nothing to rescue the markets
from the pain of continued earnings warnings. With the
quarter over companies now know what the final sales
numbers were and for many their expectations fell short.
The two major names leading the drop this morning
were VRTS and CNXT. Since VRTS just affirmed estimates
only three weeks ago the warning was definitely a real
surprise. VRTS saw $4 billion in market cap erased
today and distrust of management soared to a new high
only weeks after the company recovered from a prior
accounting scandal that cost the CFO his job. According
to VRTS sales are normally concentrated in the last
part of the quarter and anticipated order flow did not
materialize. Multiple companies have said corporations
are just not committing to new expenditures because
of the uncertainty in the economy. Major software
purchases are definitely in that category.

CNXT lost -40% of its value after warning of weak
sales in the broadband wireless market. CNXT said it
would only earn two cents instead of the five cents
analysts had expected.

Intel, the target of choice lately, was cut by Lehman
on fears that PC demand for the back to school season
was weak. Lehman also said problems in the Grantsdale
chipset would also impact profits. Intel has been the
daily target for the last week as each analyst gets
his 15 min of fame for his downgrade.

Other warnings/downgrades before the open included MUSE,
EMBT, KVHI, LSCC, AMCC, BRCM and BOBJ. BRCM lost nearly
-$4 on the Lehman downgrade of the sector. After the
bell today the warning parade continued with KANA, JDAS,
ASCL, SCUR, FILE, TFX, WDHD and NTPA. The damage is not
restricted to the chip and software sector but it is
definitely concentrated in those areas. The SOX dropped
another -4% on the news and closed well under 450 support
at 439. This is a major break in the chips and only a
week after the Semiconductor Association said billings
rose +36.9% compared to the same month last year. The
problem appears to be perception that the peak has
passed. The analysts are quoting order and backlog
surveys that suggest April was the peak in chips and
the sector will decline into 2005. Many analysts are
now noting that institutional investors are exiting
chips in expectations of the end of the cycle.

Earnings warnings have been thicker than mosquitoes at
a summer picnic. How thick is a cause for discussion
and there is no clear consensus. A report on CNBC
today quoted 43 of 60 S&P pre-announcements as warnings.
They were claiming it was the worst warning series
since March of 2003. However, First Call said that
though Thursday night there were only 1.4 negative
outlooks for every positive outlook. They claim that
overall 981 companies had issued guidance, 344
positive, 148 inline and 489 negative. For the S&P
they quoted a ratio of 0.8 to 1 negative to positive.
First Call said that was the lowest ratio since they
began tracking eight years ago.

Something does not compute. If warnings are so few
then why is the market imploding on every warning?
Could it be that hopes were simply too high after the
last four quarters of very strong performance? If you
answered yes to that question give yourself a gold
star. The market was priced to perfection assuming
the economy was in breakout mode with good times ahead.
We celebrated the monster job gains in April/May and
the markets pulled out of the May decline on the
assumption that the early signs of cracks in the
economics were just superficial. Earnings in Q1 hit
+26% and Q1 GDP was +4.4%. No challenge there. Suddenly
they are quoting only +19% for Q2 and possibly lower
and as little as +5% for Q4. (First Albany) Earnings
deceleration is rapidly increasing and those that are
warning are some high profile names. It also does not
help that almost every analysts has taken it upon
himself to downgrade techs in some fashion.

Is this smoke or is it real? We really won't know
until next week. We do get earnings from AA, DNA, ACN
and YHOO tomorrow and GE on Friday but the real parade
of blue chips does not start until next week. If the
ratio of warnings is really that low then in theory
the earnings will surprise to the upside and everyone
will breathe easier once again. Of course there is
always the chance this will be an inline quarter and
you know how well investors react to only inline
performance. The challenge is of course the guidance
and not really the earnings. Beginning with Q3 the
comps to Q3/Q4-2003 become very tough and posting
double digit growth will become increasingly harder
to accomplish. Thus the very low earnings estimates
for the 4Q amid the weakening economics.

As if the market did not have enough to worry about
today there was a huge amount of news. Sabotage in
Iraq and troubles in Norway and Nigeria sent oil
prices soaring once again to near the $40 level. The
trial in Russia and tax claims against oil giant Yukos
has sent ripples through the sector. The Kremlim hit
them with a $3.4 billion tax bill and caused a shake
up on the board. While nobody expects a slowdown in
exports there is always that possibility for a
company in turmoil. The sharp jump in oil prices
did not help stock market sentiment.

Kerry announced John Edwards as his running mate and
the anti business complainers came out of the woodwork.
On every channel and every medium were talking heads
claiming Edwards would be bad for business and the
fight was on. In what may have been a good move for
Kerry on one front by adding the young, handsome
trial lawyer it was a negative on another. The Bush
camp was quick to point out that Edwards was the
second choice and had repeatedly claimed he would
not accept a VP position. But then he is a politician
and his lips were moving. Part of the market drop
today was the uncertainty principle as the chances
of a Kerry win and the impact of a Kerry/Edwards
administration were weighed.

According to a recent survey 92% of Wall Street
analysts wanted to see a Bush win to continue the
market rebound. A new study by the Wharton School of
Business showed that in general it makes no difference
which administration is in power with only the year
surrounding the election highly volatile. The survey
showed a +3.74 jump in the month after the election
if a republican won and only a +1.59% rise for a
democrat. However, in the year following the election
a democrat win averaged a +7.55% gain compared to a
+1.28% gain for republicans. The study went on to show
that since 1897 the Dow had gained nearly twice as
much under democratic administrations. Since 1945
the S&P had averaged a +10.7% annual return under
the democrats and only +7.6% under republicans. Please
remember that statistics can be skewed to show anything
the researcher wants to portray and this survey did not
take into account things like who controlled congress.
It is widely known that a divided term with opposing
forces in control will produce gridlock and very little
damaging legislation can make it through successfully.
It also did not take into account things like wars and
9/11. Regardless the markets reacted to the Edwards
announcement three weeks before the convention and it
may continue to react in the weeks ahead.

According to one report today mutual fund cash is
nearing record lows. TrimTabs claims inflows to equity
funds have increased over the last six weeks with $2.3
billion added to stock funds last week. AMGData claimed
+$3.8 billion for the same week ended June 30th with
$2.25 billion going into the iShares Russell 2000 Index
fund alone. TrimTabs claims +$9 billion inflows for
the entire month of June. Most of the money is coming
out of bond funds with a highly anticipated rate hike
driving investors from bonds to equities. Money market
funds lost -$48 billion according to AMGData. Despite
all the shuffling of deposits it is rumored that funds
are walking a tight rope between being fully invested
and retaining cash for disbursements. This suggests
a positive bias but it is sure not showing up in the
markets. This weeks fund flows will be very telling.

The markets are on the verge of some critical technical
damage. I said on Sunday the Dow could move to 10150
and the Nasdaq could see 1965 without any material
change in status. I did not expect it to happen in
only one day. The Dow hit 10191 intraday and the Nasdaq
fell to 1959 and closed just above critical at 1967.
We have definitely seen a change in the trend and that
change was led by techs. The Nasdaq has seen 1962-1964
as support since May 26th and that support has held
through three separate tests. As long as this test
holds, the range for the last six weeks will be intact.
A break here by the Nasdaq could easily take us back
to 1900. This is a critical support level that must
be defended if the bulls have any hope of a summer
rally. The Dow fell to 10200 and barely recovered
into the close. This is well below the recent range
support at 10300 but it is still within the broader
range of 10100-10500. This 10200 level is decent
support but a break here could see Dow 10K very
quickly.

Personally I think the selling is overdone. I think
it was a knee jerk reaction to several high profile
warnings as well as outside events like oil, the
elections and the almost unanimous downgrade of the
chip sector. I think all the expectations of upside
earnings surprises has been removed from the market
and earnings risk has been negated. However we still
have three days before real earnings volume will
appear and the truth begins to come out. I looked
at the internals today and they were terrible. The
declining volume across all markets was 6:1 over
advancing. Decliners beat advancers 2:1 but compared
to the volume figures it was not that bad. Stocks
that warned got crushed on heavy volume. (VRTS -9.55,
-36%, 81 million shares) but other than chips the rest
of the market was passive. The TRIN closed at 2.45
and the Nasdaq TRIN at 3.76. The put call ratio is
1.08. All of these indicators suggest the market is
very oversold and a relief bounce could be in our
future.

Many blue chip stocks have declined to very strong
support and they appear to be holding this support.
Intel at $26 is at its 200wk average and at strong
horizontal support. Can it be knocked lower? Yes but
it will take a lot more negativity to push it over the
cliff. IBM at $86 has imploded on chances it would warn
but $86 is strong support and its warning window has
passed. IBM announces earnings Thursday of next week.
In short I think the pressure should ease tomorrow.

We could always have some new event appear or some
new warning from a high profile company but the Intel
story is over. The SOX story is over. The software
sector has been decimated but the JDAS warning tonight
could still produce weakness. Further serious drops
from here will require some new event. That event may
be just fear of the event risk around the democratic
convention or a real earnings miss from some blue chips
next week. I doubt YHOO earnings tomorrow night will
tank the market since it has already dropped -$4 from
its highs of $36.50 last week and $32 is strong support.
It can fall more but earnings expectations have already
been removed.

My thought process for a trading play would be to buy
the dip. However, my long-term outlook is still for
weakness ahead. I think the summer event risk coupled
with investor apathy will continue to give us a range
bound market with risk to the downside as the summer
progresses. How do you play that market? Very carefully!
Until we find out where the next rebound will fail we
are in unstable territory. I would be very surprised
if it was much over 10300 and a lower high in that
range would send a very negative signal to traders.
Until we see what those 300+ companies actually say
with earnings next week I would be very cautious
about any long positions.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


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

Pre-announcement season begins with a slam

Quarterly earnings warnings from software makers set today's
negative tone and had the GSTI Software Index (GSO.X) 141.96
-5.04% lead a broad list of sector loser.

Rising oil prices also weighed on investor's minds with August
Light, Sweet Crude Oil futures (cl04q) $39.51 +2.91% jumping back
near the $40.00 mark, where another attack on an Iraqi pipeline
cut that country's exports by half.  Earlier reports out of
Russia were that that country's top oil exporter Yukos Oil may
have to cut output due to its tax disputes and pending
bankruptcy.  Later in the afternoon, oil eased from hits session
highs when reports surfaced that Yukos officials said production
would not be curtailed.

U.S. Market Watch - 07/06/04 Close



Energy and financials showed some relative strength in today's
session, but that's about the only positive sign a bulls could
hold onto in today's session.

After surging higher on Friday, Treasuries gave back a fraction
of those gains.

As is often the case after a three-day weekend, U.S. Dollar Index
($dx00y) intra-day ranges are inaccurate, and intra-day charts
for today's trade unavailable.  However, the U.S. Dollar Index
(dx00y) 88.21 would have shown strength from Friday's closing
value of 87.99.

Option volatility measures spike higher in today's trade, but
after reaching 16.75 and getting pretty close to my historically
low 16.78 level, the VIX.X reversed that high to finish more
towards its session lows, giving some thought that put sellers
were trying to take advantage of a spike in option premiums in
the afternoon session.

Market Snapshot / Internals - 07/06/04 Close



Earnings warnings among technology weighed more heavily on the
NASDAQ where decliners outnumbers advancers by a hefty 3 to 1
margin and new lows outnumber advancers for the first time since
June 22.

The NYSE faired slightly better, but also showed weak internal
figures.

Today's action has the NASDAQ's 5-day NH/NL average ratio
slipping back below its 10-day NH/NL average ratio, following the
NYSE's similar move from Thursday.

While the 10-day NH/NL average ratios remain in a column of X,
the 5-day below 10-day suggests a near-term lack of bullish
leadership and is more defensive.

GSTI Software Index (GSO.X) - Daily Intervals



Not too different from the Semiconductor Index (SOX.X) is the
GSO.X's declines after testing downward trend from the January
highs last week, where today's earnings warnings from Veritas
Software (NASDAQ:VRTS) $17.00 -35.96% and Micromuse (NASDAQ:MUSE)
$5.17 -20.09%, which traded as low as $3.97 earlier, were not
amusing to bulls.

After the close, bulls bid up shares of Quest Software
(NASDAQ:QSFT) $11.10 -9.08% to $12.34 said it now sees pro forma
earnings per share for the quarter at the high end of previous
guidance given to analysts (gain of $0.07-$0.09).

NASDAQ-100 Tracker (QQQ) - Daily Intervals



With a jump in various volatility measures, I like a naked put
sell for the QQQ July $35 puts, which obligates the seller of
these puts to buy the QQQ at $35, less the $0.20 per contract
received.

Now, I profiled a round lot of 10 puts, which would equate to
1,000 shares of a $35 security.  With a pattern of higher highs
and higher lows, I thought this would bee a good risk/reward
play.

While I (Jeff Bailey) may not feel overly comfortable being
exercised on 1,000 shares of QQQ at $35.00, there's nothing to
say a trader that is "naked" the $35.00 puts can hedge that
position with an outright QQQ short on a break below today's low.

However, I think these puts expire worthless by July expiration.

S&P 500 Index (SPX.X) Chart - Daily Intervals



I keep going back to the May 25, 2004 Index Trader wrap, and I
did so once again today.  If you quickly review that wrap, you
will the Market Volatility Index VIX.X chart and tonight's
reference to the 16.78 level.  Today's VIX.X low was 16.13, so
the VIX.X traded back up and within that range.

In the 05/25/04 Wrap, I also showed an option chain of the SPX.X
that day, which I sorted by volume.  Note the volume that day in
the July 1,100 puts (SPTST).

Today, both the July 1,100 (v 6,674 : OI 43,327) and July 1,110
(v 6,288 : OI 13,905) were the two most actively traded
contracts.  Both strikes are VERY close to WEEKLY S2 and MONTHLY
S2 support levels.

Dow Industrials (INDU) Charts - Daily Intervals



Still "out the money" in the DIA July $100 puts, and time is
running out.  It's decision time for me, and I'm up against the
options market maker.  Hmmm... If I were an options market maker,
I'd try and influence some buying in the July DIA $102 puts with
a move lower at the open.  Maybe to DIA $101.50, get some put
buyer to buy some premium, then look for a MONTHLY settle back
near 10,350 with the Dow/DIA stuck in a range from 10,000 to
10,500.

Pivot Analysis Matrix - 07/06/04 Close



The INDU, SPX and OEX settled out right near their WEEKLY S1s,
where relative strength from the S&P Banks Index (BIX.X) 345.89
-0.36% as well as broader financials, watered down losses among
technology, where both the Semiconductor Index (SOX.X) 439.14
-3.97% and tech-heavy NASDAQ-100 (NDX.X) 1,445.71 -2.39% and its
Tracking Stock (AMEX:QQQ) $36.03 -2.14% extend losses for a
third-straight session.

As noted when revisiting the Semiconductor Index (SOX.X) and our
reverse head and shoulder chart, should SOX.X give way from
MONTHLY S2, the SOX.X looks capable of fulfilling the downside
pattern objective of 412, where the NDX/QQQ would most likely be
pulled lower to July's MONTHLY S2s.

Jeff Bailey


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

Investors Turn Wary
- J. Brown

Our week is not off to a good start.  The 63-point drop in the
Industrials broke support at the simple 50-dma and extended the
sell signal in the Dow's MACD.  The NASDAQ's 2% decline looks
even worse breaking support at the 2000 mark and its simple 200-
dma not to mention the rest of its moving averages and a new sell
signal on its MACD.  The S&P 500 followed suit with a close under
its 40 and 50-dma's.  The technical damage gets even worse if you
look at some of the sector-specific indices.

The DDX disk drive index has hit new yearly lows under the 100
level.  Hardware stocks in the GHA index lost 3.5% and broke
through support at the 200-dma, the 240 mark and produced a new
MACD sell signal.  Software stocks look even worse with the GSO
index falling more than 5% to hit new seven-month lows.  The
semiconductor SOX index fell almost 4% to break support at the
450 mark.  The list goes on but you get the point.  Tech stocks
lead the way down with an outbreak of new earnings warnings from
VRTS, CNXT and MUSE.  After the closing bell on Tuesday there
were more with ASCL, KANA and SCUR all warning as well.  Investor
confidence is taking a beating here.

Lehman Brothers helped push tech stocks into bearish territory
with its pre-market downgrade of the semiconductor sector.  A
disappointing ISM services number didn't help.  Of course the
story of the day was John Kerry choosing John Edwards as his
running mage, a move the business world was not happy to see.

Tomorrow there is hope for a rebound if Dow-component Alcoa (AA)
can start the day off with a positive earnings report.  If not
then YHOO has a chance to inspire courage with its own earnings
report after Wednesday's closing bell.  Yet there is danger here
too since expectations are pretty high for YHOO and if they don't
reach them tech stocks could sink again on Thursday.  Be careful.
Investors aren't finding much reason to buy stocks and the surge
in crude oil prices undermines both consumer and business
confidence.


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  8996
Current     : 10219

Moving Averages:
(Simple)

 10-dma: 10358
 50-dma: 10245
200-dma: 10172



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  960
Current     : 1116

Moving Averages:
(Simple)

 10-dma: 1133
 50-dma: 1119
200-dma: 1099



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1204
Current     : 1445

Moving Averages:
(Simple)

 10-dma: 1488
 50-dma: 1451
200-dma: 1443



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

CBOE Market Volatility Index (VIX) = 16.25 +1.17
CBOE Mkt Volatility old VIX  (VXO) = 16.17 +1.08
Nasdaq Volatility Index (VXN)      = 22.11 +2.22

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

          Put/Call Ratio  Call Volume   Put Volume

Total          1.08        654,782       705,568
Equity Only    1.00        499,103       499,144
OEX            0.93         30,695        28,687
QQQ            6.90         27,412       189,250


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

Bullish Percent Data

           Current   Change   Status
NYSE          66.7    + 0     Bear Confirmed
NASDAQ-100    50.0    + 0     BULL ALERT
Dow Indust.   70.0    + 0     Bear Confirmed
S&P 500       64.2    - 1     Bear CORRECTION
S&P 100       66.0    - 1     Bear CORRECTION



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-dma: 1.95
10-dma: 1.44
21-dma: 1.18
55-dma: 1.14


Extreme readings above 1.5 are bullish, and readings below .85
are bearish.  These signals don't occur often and tend be early,
but when they do, they can signal significant market turning
points.


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

Market Internals

            -NYSE-   -NASDAQ-
Advancers    1005       763
Decliners    1805      2281

New Highs      63        28
New Lows       29        61

Up Volume    336M      148M
Down Vol.   1216M     1747M

Total Vol.  1565M     1914M
M = millions


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

Commitments Of Traders Report: 06/29/04

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

It would appear that no one wanted to make any big bets this
week with the Iraq handover, the FOMC meeting and the Jobs report.
Commercial traders remain slightly bearish and small traders remain
bullish.


Commercials   Long      Short      Net     % Of OI
06/08/04      397,294   452,904   (55,610)   (6.5%)
06/15/04      428,905   444,197   (15,292)   (1.8%)
06/22/04      407,842   415,462   ( 7,620)   (0.9%)
06/29/04      405,273   413,351   ( 8,078)   (0.9%)


Most bearish reading of the year: (111,956) -  3/06/02
Most bullish reading of the year:   23,977  - 12/09/03

Small Traders Long      Short      Net     % of OI
06/08/04      158,373    92,794    65,579    26.1%
06/15/04      169,595   115,336    54,259    19.0%
06/22/04      124,985    89,934    35,051    16.3%
06/29/04      129,978    94,535    35,443    15.7%

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

Commercial traders have tempered their bearishness a bit but they
remain very bearish on the e-minis.  Likewise small traders are
still very bullish.  One group is going to be terribly wrong here
and odds are in favor of the big traders.


Commercials   Long      Short      Net     % Of OI
06/08/04      367,191   409,246    (42,055)   (5.4%)
06/15/04      440,867   522,546    (81,679)   (8.5%)
06/22/04      229,290   446,974   (217,684)  (32.2%)
06/29/04      258,443   447,505   (189,062)  (26.7%)


Most bearish reading of the year: (354,835)  - 06/17/03
Most bullish reading of the year:  133,299   - 09/02/03

Small Traders Long      Short      Net     % of OI
06/08/04      140,191     84,649    55,542    24.7%
06/15/04      216,759    147,247    69,512    19.1%
06/22/04      243,444     58,389   185,055    61.3%
06/29/04      236,492     47,780   188,712    66.3%


Most bearish reading of the year: (77,385)  - 09/02/03
Most bullish reading of the year: 449,310   - 06/10/03


NASDAQ-100

Commercial traders are relatively neutral on the NASDAQ-100
with a small bullish bias.  Meanwhile small traders have turned
a bit more bearish on the group.


Commercials   Long      Short      Net     % of OI
06/08/04       64,747     41,178    23,569   22.3%
06/15/04       78,542     54,341    24,201   18.2%
06/22/04       40,397     37,413     2,984    3.8%
06/29/04       41,078     37,194     3,884    4.9%


Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:  25,160   - 06/01/04

Small Traders  Long     Short      Net     % of OI
06/08/04        9,716    29,594   (19,878)  (50.6%)
06/15/04       15,794    35,880   (20,086)  (38.9%)
06/22/04        9,311     9,950      (639)  ( 3.3%)
06/29/04        7,437    11,904    (4,467)  (23.1%)


Most bearish reading of the year: (20,270) - 06/01/04
Most bullish reading of the year:  19,088  - 01/21/02

DOW JONES INDUSTRIAL

Not much change for the commercial traders.  They remain bullish
on the Dow Industrials.  Small traders have turned a little more
bearish on the index.


Commercials   Long      Short      Net     % of OI
06/08/04       24,636    25,821   (1,185)     (2.3%)
06/15/04       30,438    24,766    5,672      10.3%
06/22/04       26,808    19,752    7,056      15.2%
06/29/04       27,278    20,512    6,766      14.1%


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

Small Traders  Long      Short     Net     % of OI
06/08/04        8,325     6,431    1,894     12.8%
06/15/04       13,942    20,953   (7,011)   (20.1%)
06/22/04        5,626     7,798   (2,172)   (16.2%)
06/29/04        4,930     7,682   (2,752)   (21.8%)


Most bearish reading of the year: (12,106) -  3/09/04
Most bullish reading of the year:   8,523  -  8/26/03

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


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The Option Investor Newsletter                  Tuesday 07-06-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: ETN, DHR, INFY
Dropped Puts: None
Call Play Updates: AHC, BOL, EBAY, QCOM
New Calls Plays: None
Put Play Updates: APPX, GCI, IRF, NTES, OMC, SLAB
New Put Plays: DISH


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

Eaton Corp - ETN - close: 61.54 chg: -0.72 stop: 61.85

The market decline on Tuesday was too much for ETN to endure.
Shares were looking a little weak on Friday with the drop through
its narrow rising channel and simple 10-dma.  We were expecting
support at the $62.00 level to hold.  Unfortunately, it did not
and now $62 looks like resistance.  Further complicating matters
for the bulls is the new MACD sell signal from overbought status.
We'd expect ETN to slip back toward the $60 level soon.  Today's
drop stopped us out at $61.85.


Picked on June 18 at $ 62.05
Change since picked:  - 0.51
Earnings Date       07/15/04 (confirmed)
Average Daily Volume:    1.0 million
Chart =


---

Danaher Corp. - DHR - close 49.64 change: -0.63 stop: 50.00

We've been stopped out in DHR at the $50.00 mark with today's
1.25% decline.  Shares of DHR had pulled back toward round-number
psychological support at $50.00 but today's market-wide decline
was too much pressure and DHR cracked.  The MACD indicator has
produced a new sell signal from overbought status and it doesn't
look good.  We'd expect DHR to test previous resistance now new
support at the $48.00 level.

Picked on June 20th at $48.74
Change since picked:   + 0.90
Earnings Date         4/22/04 (confirmed)
Average Daily Volume =   1.55 mln
Chart =


---

Infosys Tech. - INFY - close: 93.22 change: -2.27 stop: 90.95

Uh-oh!  We have good news and bad news for INFY.  The good news
is INFY, a software stock, out performed the GSO software sector.
The VRTS implosion today sent the GSO index for a 5% loss.  INFY
managed to escape with a 2.3% loss.  Nimble traders could have
used the drop towards the $90-91 level as a bullish entry point
and it appears someone did with INFY rebounding more than $2.00
from its lows in the last half hour of trading.  That's the good
news and INFY looks poised to continue its rebound tomorrow.  The
bad news is we found INFY's next earnings release to be July 13th
before the opening bell.  While that can be frustrating the real
bad news was today's intraday drop to $90.80 was under our stop
at $90.95.  We were a little to conservative with this volatile
stock.  Nimble traders may want to give INFY another look and try
and ride any bounce from today's low into earnings.  Remember, we
normally don't suggest holding over any earnings announcement.

Picked on July 4th at $95.49
Change since picked:  - 2.37
Earnings Date       07/13/04 (confirmed)
Average Daily Volume =   292 K
Chart =



PUTS:
*****

None


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

Amerada Hess Corp. - AHC - close: 79.86 change: +0.53 stop: 77.50

A $1.26 jump in crude oil to $39.65 a barrel helped push AHC to a
new high above the $80.00 level on Tuesday.  Unfortunately, the
stock couldn't maintain its gains as the broader indices on Wall
Street slipped backward.  Volume has been pretty light for AHC
the last couple of sessions and we'd like to see another rally
higher with volume backing it up.  We will continue to look for
dips toward $78 as potential entry points and the rising simple
10-dma currently at $78 should act as short-term support.  No
change in our stop loss at $77.50.  Remember that our target is
the $82-83 level.

Picked on June 17th at  $74.15
Change since picked:     +5.71
Earnings Date          7/28/04 (unconfirmed)
Average Daily Volume =    1.12 mln
Chart =


---

Bausch Lomb - BOL - close: 63.81 change: -1.24 stop: 62.99

We don't have much to report on for BOL today.  Shares slipped
1.9% toward the bottom of its recent trading range near $63.50.
More aggressive traders might consider bullish positions here
above the simple 50-dma but we'd rather wait for BOL to hit our
trigger point at $66.01.  Until then we'll sit on the sidelines.

Picked on July xx at $ xx.xx <-- See TRIGGER
Change since picked:  + 0.00
Earnings Date       07/29/04 (confirmed)
Average Daily Volume:    490 thousand
Chart =


---

eBay Inc - EBAY - close: 89.84 change: -1.43 stop: 87.50

The weakness in the tech sector on Tuesday was not lost on EBAY
or the Internet sector.  The INX Internet index slipped 2.5%
while EBAY followed with a 1.5% drop of its own.  This is the
first close under $90.00 for EBAY since June 24th.  We're still
bullish on the stock and any dips toward the $88.00 level can be
used as bullish entry points but traders might feel more
comfortable waiting for a move back through the $92.00 mark
before committing capital.  Tomorrow will be an important day for
Internet stocks.  Yahoo (YHOO) is set to report after the bell on
Wednesday and analysts are expecting 8 cents a share.  There have
been rumors circulating for a couple of weeks now that YHOO will
turn in a very strong quarter (beating estimates).  If they can
deliver then the Internet sector is likely to rally on Thursday.
If YHOO disappoints, well then odds are we could be stopped out
on Thursday.

Picked on June 27 at $ 90.72
Change since picked:  - 0.88
Earnings Date       07/21/04 (confirmed)
Average Daily Volume:    8.3 million
Chart =


---

QUALCOMM - QCOM - close: 70.58 change: -1.69 stop: 69.00

Last week it was Merrill Lynch who reiterated their "buy" rating
and raised their target price for QCOM to $90.  This week it is
Piper Jaffray who reiterates their positive outlook and raised
their price target on QCOM to $93.  Too bad it didn't do much for
the stock's share price today.  QCOM still slipped 2.33% in
Tuesday's technology-led sell-off.  Fortunately, support at the
$70.00 mark held.  This may be an entry point for new bullish
positions but we would look for signs of a bounce before
initiation new plays.  A move over $71.05 might be a good mental
trigger to go long.

Picked on June 29 at $ 71.55
Change since picked:  - 0.97
Earnings Date       07/21/04 (confirmed)
Average Daily Volume:    8.8 million
Chart =



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

None


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

American Pharma. - APPX - close: 26.54 chg: -2.53 stop: 29.07*new*

Wow!  We knew APPX looked weak but we didn't expect an 8.7% drop
on volume 50% above average right off the bat.  The stock's daily
MACD indicator has produced a new sell signal and APPX is already
within striking distance of our initial target near $25.00.
Shares are very short-term oversold so we can expect a bounce.
We're going to lower our stop loss to breakeven at $29.07 but
more conservative traders might want to put a stop near the
$28.00 level.  We would not suggest new entries at this time
unless APPX did bounce and begin to roll over again.

Picked on July 04 at $ 29.07
Change since picked:  - 2.53
Earnings Date       07/22/04 (unconfirmed)
Average Daily Volume:    910 thousand
Chart =


---

Gannett Co - GCI - close: 82.95 change: -0.58 stop: 86.05

Shares of GCI etched another "O" in its bearish P&F chart
strengthening last week's quadruple-bottom breakdown sell signal.
The company said it was doubling the ad space for its elevator ad
unit but investors weren't listening.  This is a tough spot to
consider new plays.  The best spot to initiate new bearish plays
would be a bounce and failed rally under $84 or $85.  We're going
to leave our stop loss at $86.05 near the 200-dma.  More
conservative traders might be able to get away with a stop loss
near the 10-dma near $84.85.  Remember that we plan to exit near
the $80.00 level.

Picked on July 01 at $ 83.95
Change since picked:  - 1.00
Earnings Date       07/13/04 (confirmed)
Average Daily Volume:    957 thousand
Chart =


---

Int'l Rectifier - IRF - close: 35.90 chg: -1.76 stop: 39.51*new*

We didn't have to wait long.  IRF was added to the play list on
Sunday with a TRIGGER at $37.00.  Lehman Brother's Monday morning
downgrade of the semiconductor sector and Stephen's downgrade of
IRF to "equal weight" sent IRF falling.  Shares of IRF opened at
$37.53 and then promptly fell through our trigger price.  Volume
has been very big the last three sessions, all of which were
negative.  The P&F chart's bearish target has slipped from $31 to
$27 with Tuesday's 4.67% drop.  Be careful initiating new
positions here.  IRF is short-term oversold and is right at the
descending trendline of support (if you stretch a trendline
across the lows from December-March-April-May...).    A bounce
back toward $38.00 and a failed rally/roll over there might be a
good spot to consider new bearish positions but momentum players
can look for a drop through today's low.  We're going to lower
our stop loss from $41.60 to $39.51.

Picked on July 6th at $37.00
Change since picked:  - 1.10
Earnings Date        4/29/04 (confirmed)
Average Daily Volume =  1.07 mln
Chart =


---

Netease.com - NTES - close: 37.71 chg: -1.15 stop: 41.76*new*

A tough day in the Internet sector helped push NTES to another
2.95% loss on Tuesday.  The INX Internet index lost 2.5% as
investors jumped out of tech stocks after numerous earnings
warnings.  NTES continues to look great for the bears but we're
entering dangerous territory.  YHOO is due to report earnings
after the bell on Wednesday.  If YHOO delivers with above and
beyond results the Internet sector is likely to rally on
Thursday.  We need to be on the look out for a potential bounce
back toward the $40.00 level in NTES.  A failed rally there and
we can initiate new positions.  More conservative traders may
want to actually place their stop above the $40 level.   We're
going to lower ours to $41.76.

Picked on July 01 at $ 39.38
Change since picked:  - 1.67
Earnings Date       07/26/04 (unconfirmed)
Average Daily Volume:    1.7 million
Chart =


---

Omnicom Group - OMC - close: 72.90 change: -0.52 stop: 76.01*new*

It was another positive day for the bears in OMC.  Shares gapped
down and after a brief rebound attempt spent the day trading
sideways.  We've very close to the $72.00 support level (shares
bounced from $72.50 this morning) and we would not suggest new
plays at this time.  Actually, we'd probably recommend taking
some profits with OMC's six-day decline.  The stock is looking
short-term oversold and due for a bounce.  Adding to the odds of
a bounce is today's "doji" candlestick, which indicates
indecision.  We're going to lower our stop loss to $76.01 for now
but more conservative traders can lower theirs toward the simple
10-dma near $75.50.

Picked on June 20th at $77.14
Change since picked:   - 4.24
Earnings Date         4/27/04 (confirmed)
Average Daily Volume =   1.09 mln
Chart =


--

Silicon Labs. - SLAB - close: 42.11 chg: -1.62 stop: 46.01*new*

We certainly can't complain about SLAB's 3.7% decline on Tuesday.
Lehman Brother's pre-market downgrade of the semiconductor sector
was just what the bears wanted to hear.  SLAB gapped slightly
lower and quickly fell toward the $42 level making a new relative
low and a new six-month low.  The SOX's 4% drop on Tuesday broke
through several support levels but the group looks oversold and
due for a bounce.  The same can be said for SLAB.  A bounce back
to $45.00 might be a new entry point but we'd rather focus on an
exit.  SLAB is within striking distance of our $40 target now;
plan accordingly.  We're going to lower our stop loss to $46.01.

Picked on June 20th at $44.99
Change since picked:   - 2.88
Earnings Date         4/26/04 (confirmed)
Average Daily Volume =   1.14 mln
Chart =



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

EchoStar Comm. - DISH - close: 29.62 chg: -0.67 stop: 31.01

Company Description:
EchoStar Communications Corporation serves 10 million satellite
TV customers through its DISH Network(TM) and is a leading U.S.
provider of advanced digital television services. DISH Network's
services include hundreds of video and audio channels,
Interactive TV, HDTV, sports and international programming,
together with professional installation and 24-hour customer
service. DISH Network is the leader in the sale of digital video
recorders (DVRs). (source: company press release)

Why We Like It:
We're adding DISH to the put list due to its relative weakness
and bearish technical picture but there could be a story brewing
too.  For months DISH has been stuck in a trend of lower highs as
investors use every sign of strength to rotate out of the stock.
The developing trend has pushed it back toward support at the
$29.00 level and produced a bearish P&F chart with an $18.00
target.  Tuesday's 2.2% drop caught our attention due to its
strong volume, well above the norm.  Rumors and chatter on
Tuesday was circulating that DISH has received some sort of
letter from the SEC regarding their subscriber count.  We
couldn't find any details but the story could break soon.  We
want to be ready should DISH breakdown from its current pattern.
We'll start the play with a TRIGGER at $28.99.  Until DISH trades
at our below our trigger point we'll sit on the sidelines.  If we
are triggered we'll use an initial stop loss at $31.01 and a
target in the $25-24 range.  DISH has P&F support near $24.

Suggested Options:
July options expire soon so we're going to use the August puts.
Our favorite is the August 30s.

BUY PUT AUG 32.50 UAB-TZ OI= 127 Current Ask $3.30
BUY PUT AUG 30.00 UAB-TF OI= 198 Current Ask $1.60
BUY PUT AUG 27.50 UAB-TY OI= 644 Current Ask $0.65

Annotated Chart:



Picked on July xxth at $xx.xx <-- see TRIGGER
Change since picked:   - 0.00
Earnings Date        08/11/04 (unconfirmed)
Average Daily Volume =    2.5 mln
Chart =



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

Please read our disclaimer at:
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Contact Support


The Option Investor Newsletter                  Tuesday 07-06-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Education to Beer and more!
Leaps: Anti-Climactic
Spreads & Straddles: Buyers Take Extended Holiday...
Premium Selling Plays: Naked Puts & Calls
Traders Corner: Dow Theory and Technical Analysis: Dous (2)


**********
WATCH LIST
**********

Education to Beer and more!

___________________________________________________________________

How to use this watch list:
  Readers can use the candidates below as a springboard for their
  own research.  Many are in the process of breaking support or
  resistance or in the process of starting new trends or
  extending old ones.  With your own due diligence these could be
  strong potential plays.
___________________________________________________________________


Apollo Group - APOL - close: 87.12 change: -0.28

WHAT TO WATCH: Keep an eye on APOL.  The stock has weathered a
dark storm surrounding the education industry but has come out
relatively unscathed while its rivals have been hit pretty hard
by scandal.  Even so APOL looks like a bearish candidate with the
rebound and failed rally back toward the $90 level.  APOL has
been struggling with short-term resistance at its simple 10-dma
during the last few sessions and we suspect APOL is vulnerable
towards the $82-80 region.  What makes us pause is the still
bullish P&F chart with a $99 target.

Chart=


---

Ball Corp - BLL - close: 72.11 change: +1.35

WHAT TO WATCH: BLL might be worth watching.  The markets were
widely negative on Tuesday but BLL managed a 1.9% rebound from
the 70.00 region.  The close over the $72 level is bullish.
Unfortunately, its MACD indicator looks overbought and currently
in a new sell signal.  In contrast its P&F chart is bullish and
points to a $95 target.  Earnings are expected near July 29th.
Bulls might want to consider plays on a move past $72.50.

Chart=


---

Adolph Coors - RKY - close: 72.95 change: +1.00

WHAT TO WATCH: You have to give RKY some credit for its relative
strength.  The stock bucked the trend today and jumped another
1.38% to hit new 3 1/2 year highs and push through resistance at
$72.50.  We hesitate to suggest bullish plays because RKY is very
overbought with nary a pause in its six-week rally.  We think
odds are climbing for a "sell the news" event on its July 22nd
earnings report.

Chart=


---

CDWC Corp - CDWC - close: 59.16 change: -1.87

WHAT TO WATCH: Computer and technology mail-order catalog company
CDWC is suffering from a sudden drop in share price.  The stock
has been struggling with resistance at its simple 50-dma over the
last three weeks but last week CDWC broke through its simple 200-
dma and now shares are breaking support at the $60.00 mark.
There is some historical support at $57.50 from last fall but we
suspect the stock is headed for the $55 level.  Earnings are due
around July 20th.

Chart=



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*****
LEAPS
*****

Anti-Climactic
By Mark Phillips
mphillips@OptionInvestor.com

The event ridden week that the markets have been waiting for came
and went without much to show for it.  As has been the case
recently, the day of the FOMC meeting was a complete yawner, with
the real reaction coming the next day.  Equity markets headed
south into the end of the week, while bonds soared, causing yields
to crack significantly lower.

Remember our conversation a couple weeks ago, where I was looking
for yields to head lower in the wake of the FOMC decision, even if
we got the expected 25 basis point hike.  The reason why is due to
investors coming to terms with the reality that interest rates
would be rising at a "measured pace", far slower than the dramatic
rise in yields that we've seen in bonds since March.  That
expectation was certainly confirmed last week, with the yield on
the Ten-Year Note cracking sharply lower below the 4.6% level.
With the disappointing jobs data on Friday, I wouldn't be a bit
surprised to see the Ten-Year yield work its way back down towards
the 4.1-4.2% area over the balance of the summer.

We didn't see much excitement from the precious metal sector
either.  Sure there was a push up near the $405 level, but gold
came right back towards the $400 price magnet that has been in
play for the past month.  Recall our discussions about the
constructive PnF Buy signal on the continuous Gold futures
contract.  That just helps to reinforce my opinion that gold is in
the midst of a healthy consolidation, and with the dollar likely
to show more weakness in the months ahead, we should see gold and
mining stocks making progress towards their highs from earlier in
the year.

Certainly, there are investors and traders still hoping for a
summer rally, and I wouldn't rule it out as a possibility.  But it
is going to be an upward battle, to say the least.  There's
significant event risk surrounding the political conventions, the
Athens Olympics and then the outcome of the presidential election.
Regardless of your political alignment, you can't afford to ignore
the reality that a Kerry administration is going to significantly
cut back on the stimulus that the Bush administration has supplied
to the economy.  That will translate directly into making costs
for business as a whole higher, which trickles down to reduced
profits.  At the same time, removing tax incentives to the general
population will reduce their disposable income, meaning there is
less money by which consumers can stimulate the economy.  We
already seem to be seeing signs of that effect being priced into
key Retail stocks such as WMT and BBY.

Of course, the other potential impact of removing some of the
stimulus from the Bush administration is that tax incentives for
investors will also be curtailed, making many investments --
particularly those that pay dividends -- look significantly less
attractive.

Every one of these factors point to lower prices for stocks in the
event of a Kerry presidency, and fear of that potential outcome
could continue to weigh on stock prices throughout the balance of
the summer and early fall.  Here's another interesting statistic.
Lowry's measures of Buying pressure and Selling pressure have been
exceptionally low for quite some time now and we're finally
starting to see a significant up-tick in the Selling pressure.
Could this be the beginning of the resumption of the bear market
that has been on hiatus for the past year and change?  Obviously,
it is far too early to tell, but as the great Richard Russell has
pointed out on numerous occasions in recent months, there's
obviously something wrong with a market (The S&P 500) that with
all of the stimulus seen along with 45-year lows in interest
rates, has only been able to reclaim half of its bear market
losses.

Look at a chart of any major bear market and you'll notice that
there are several instances where the market recovers half its
losses, only to roll over and then proceed to new lows.  I'm not
necessarily predicting new lows ahead (although it certainly
wouldn't surprise me), but the market isn't doing a very good job
of convincing me that it has another upward leg in store.  I
haven't talked about valuations lately, but this is another gaping
problem with the rate of economic growth slowing faster than the
'experts' expected.  No matter how you look at it, a P/E ratio
north of 20 and a dividend yield south of 2% are not attractive
values -- they are clear signs of over-valuation.

That doesn't mean the market is coming down in a hurry, but it
does create a very stiff head wind for any significant additional
gains.  Remember, there are three directions any market can take -
- up, down or sideways.  My bet for the balance of the summer is
sideways, with a slight bias to the downside.

Speaking of over-valuation, nowhere is this shown more clearly in
the housing market.  We've discussed this at great length and now
have a couple of solid play candidates on the Radar Screen that I
expect to be big winners later this year and into 2005.  There's
another aspect of the dynamics in the pending collapse (my
expectation) in the housing sector, and that is the concept of
marginal supply/demand.

There's a common misconception that it takes a large change of
supply or demand in a given market to create a substantial change
in the pricing structure.  That's simply not true because the
things that affect pricing all happen at the margin.  This is true
of any commodity that operates on finite levels of supply and
demand.  When supply and demand are balanced -- giving us price
equilibrium -- it only takes a very small change in either supply
or demand to upset that delicate balance and launch a significant
directional price move.  Of course, that is predicated on the
assumption of a market that is free from manipulative forces, but
I don't want to delve into that can of worms today.

Back in the days when I traded commodities, I was always astounded
how a major cattle report could come out showing actual supply was
0.2% greater or less than expectations and I'd then watch a
resulting limit move in the futures market unfold for 2, 3 or even
4 consecutive days.  It wasn't that the difference between supply
and demand was so large, but that the marginal supply/demand upset
the delicate balance that was in place before that report was
released.

The situation is much the same with the current Housing market.
We're looking at a new equilibrium setting itself up based on
current expectations and the Fed has been very careful to manage
those expectations so as to create a stable equilibrium.  The
question we all need to be asking ourselves is what change in
supply and demand could occur in the future to tip over this
delicately balanced apple cart.

Now let's turn our attention to our Portfolio of plays and see
what transpired in the week just finished.

Portfolio:

HD - Beginning the latest tentative rollover more than a week ago,
HD is giving us a hint of another downward move in the wake of
last week's decision on interest rates.  If the stock is going to
deliver on the downside that we've been looking for, then this
move will have to be the one that sticks.  While we still have
that pesky bullish PnF chart standing in our way, the fresh
bearish short-cycle reversal on the weekly Stochastics is
encouraging.  We'll have to see how the downside plays out over
the next couple weeks, but for now it seems reasonable to tighten
our stop.  If the highs of the past month are taken out, then I'd
say it's a safe bet that our downside expectations are not going
to be met.  Tighten stops to $36.50

CHK - With nary a sign of weakness from either the price of
Natural Gas or the Natural Gas index (XNG.X), it should come as no
surprise to see our bullish play in the sector pushing to fresh
highs again last week.  As we've been talking about, the next
upside target for CHK should be in the $16.00-16.50 area, where
significant weekly resistance comes into play.  With close to a
100% gain on the listed LEAPS from the point of play inception,
conservative traders should be looking to harvest gains near that
targeted resistance.  That doesn't mean the stock won't have more
upside, but it is simply good portfolio management.  I still have
a longer-term upside target near $20 for the stock, so after the
(expected) pullback from that resistance area, we'll look for a
new entry point to take us to that higher target.  Note that we're
also raising our coverage stop to $13.75 this weekend, just over
the 50-dma.

LUV - After going out on such a strong note a week ago, LUV was
due for some profit taking and we've certainly seen a strong dose
of it in the past 5 trading sessions.  The stock came very close
to testing the $16 support (broken resistance) level on Friday,
which also coincides with the 20-dma and 200-dma.  With volume
light all last week, it is hard to read too much into this
pullback, except to view it as a potential re-entry point ahead of
a continued rally towards strong resistance in the $19-20 area.
Maintain stops at $15 for now.

TYC - I must say I'm a bit surprised how well TYC held up last
week, as I had expected the stock to continue with the prior
week's bout of profit taking.  Instead, the stock did an about
face early in the week by shooting right back up to test the
recent highs just over $33 before heading back to the bottom of
the range of the past 2 weeks.  A near-term breakdown is still
possible, but there's solid support first at $32 and then again
near $31.25 before encountering the bottom of the rising channel
near $30.50 and then the 50-dma.  Of course, the other side of the
coin is that the weekly Stochastics are looking a bit toppy here,
so we should expect some more weakness/consolidation over the next
several weeks.  Traders looking for new entries should look for
another rebound from the vicinity of the bottom of the channel and
the 50-dma for the right setup.  As this stock has demonstrated in
its slow and plodding rally of the past year, we don't need to be
in a hurry.  Buy the dips and enjoy the ride up the chart.

AIG - The Fed's decision on interest rates certainly didn't
provide and clarity on AIG's chart picture.  While the short-term
decline is still intact, support did come in near $71, keeping
price comfortably between support and resistance.  The rising
trendline from the January lows currently crosses just below $70,
so a successful test of that line as support should confirm the
potential for an upside move.  On the other hand, a solid break
below that line would confirm the potential H&S top, with a move
below the neckline.  While I'm keeping our stop at $68 - the level
that would generate a PnF Sell signal - I would view any close
below $69.50 as an indication that this bullish play is broken.
Conservative traders unwilling to take the risk down to our
coverage stop can use that higher trigger as an exit point from
the play.

Watch List:

GM - Last week's poor numbers from GM certainly didn't get a warm
reception from investors, with the stock plunging right to the
50/200-dmas on Monday and then continuing that downward trajectory
following the FOMC meeting.  I take the price action on Thursday
as a confirmation that investors are becoming more aware that GM
is little more than a finance company that just happens to make
cars on the side.  It looks to me like the weekly Stochastics are
tipping over again and with the 50-dma crossing down through the
200-dma last week, it's time to start getting aggressive in
hunting for entries here.  We'll target entries on a rebound into
the $47-48 area and target a downside move towards the $35 PnF
price target.  We'll need to watch for potential support in the
$40-41 area on the way down.  Initial stops will be placed at
$50.50, just over the top of the rally peaks from February and
April.

OMC - Over the past 2 weeks, we've had all the bearish
confirmation from OMC that we could have asked for.
Unfortunately, we didn't quite get a strong enough bounce up to
resistance to give us the entry point we were looking for.  With
the longer-term H&S pattern confirmed, we have a downside target
of $65 to work with, and the PnF chart isn't far behind with it's
own price target of $66, which continues to fall.  We'll continue
to seek an entry into this play on a rebound to test resistance.
Lower the entry target to $76-77, which should see firm rejection
from the bears.

Radar Screen:

EK - We got a one-week blip up into the $27 area and then EK
rolled right back into the consolidation range that has kept it
prisoner these past several months.  I'm not quite ready to give
up on this one as a potential play, but this is the kind of chop
we've endured in our HD play.  This does not appear to be a
winning setup for a LEAPS play, as the only thing we accomplish in
these plays is to let the passage of time erode the time value of
our investment.

CTX - As you can see from last week's price action, the FOMC
meeting turned out to be a non-event in terms of setting a
directional play into motion in the Housing sector.  The relative
strength chart of the $DJUSHB vs. the SPX has retained its bullish
position within the rising channel, so we're not yet ready to get
aggressive on CTX.  I'm still expecting a rally back to test major
resistance in the $54-55 area before the scenario we've been
discussing over the past several weeks kicks into action.  CTX is
still a strong contender for inclusion on the Watch List, but I'm
going to wait another week before making the move.

LEN - As we've noted recently, LEN looks like the weakest link in
the Housing chain on a long-term basis, but near-term it looks
like it could make a strong upward move.  Watch for a breakout
over the 200-dma and horizontal resistance near $46.50 to get the
upside move in motion.  That should set the stage for a serious
test of the $50 area, and a rollover there would go a long ways
towards confirming the potential H&S top pattern we're looking
for.  Of course, the real signal of weakness that we need to see
is a break under the $41 level, but as we've discussed, that
should take a bit longer to unfold.  Clearly we're not in a big
hurry here and we have time to wait for the right setup.

NEM - There's just not a lot to add to what we've discussed over
the past couple weeks.  The picture for gold is looking more
bullish, but we're not yet to an inflection point that we can use
as justification for taking a position.  Gold continues to hover
near the $400 mark and NEM is still struggling with the $40-41
resistance level.  The bulls tried to get some action going last
Monday with the push above $40, but they couldn't touch the $41
level (needed for a PnF Buy signal) and the stock fell back during
the remainder of the week.  Once we get that PnF Buy signal, we
can give serious consideration to buying the next dip.  Until
then, we'll let this one move on its own, waiting for it to
convince us that the time is right.

NOK - With price action that is sneaking up on the $15 level, NOK
looks like it just might give us something to work with in the
weeks ahead.  It isn't there yet, unless you just want to play the
weekly Stochastics, which are still looking solidly bullish.  The
issue at the core of this potential play is whether NOK can
recover from its recent stumble and loss of market share to
Motorola and Samsung.  If it can, then we'll be looking for a
rally back towards the $20-22 area later this year and into 2005.
If it can't, we'll likely see the stock remain in the mid-teens.
By the lack of conviction in the current price action, we can
infer that investors are having a hard time making up their minds
too.

MSFT - As noted last week, MSFT has a pretty healthy longer-term
picture, with price testing the top of the multi-year
consolidation wedge.  The catalyst for a break from this pattern
is likely to be the announcement later this month about what the
company will do with its cash hoard.  I have a hard time getting
excited about a breakout play over the $30 level, but that may be
what is necessary.  In the event that the stock doesn't pull back
for a test of support in the $27 area, we may have to consider
setting up a breakout entry over $30.  Look for more details next
week.

Closing Thoughts:
First off I must apologize for the lateness of this column.  I had
a battle of wills with my cable modem over the weekend and clearly
I lost that battle.  Now that I'm back online, I've taken steps to
make sure this won't happen again.

I really had hoped that the market would provide greater clarity
after getting the Iraq handover and FOMC meeting out of the way.
Alas, I have to say, the few clues thrown our way in the past week
have been meager and ambiguous.  I could make a solid case for a
rally from here and I could make an equally strong case for a
broad market decline.  In the absence of strong conviction for
either outcome, I'll stick with the premise I've been operating
under for the past couple months, that of a range bound sideways
market.  Some bullish plays will work out great, while at the same
time there will be solid bearish candidates.  We'll endeavor to
benefit from both sides of the coin until the macro picture
becomes less murky.

Have a great week!

Mark


LEAPS Portfolio

Current Open Plays



LEAPS Watchlist

Current Possibles

SYMBOL  SINCE    TARGET PRICE  TARGETED LEAP  SYMBOL

CALLS:
None



PUTS:
GM     05/09/04   $47-48       JAN-2005 $ 45  ZGM-MI
                               JAN-2006 $ 45  WGM-MI
                            PC SEP-2004 $ 50  GM -IJ
OMC    06/20/04   $76-77       JAN-2006 $ 80  YGS-MP
                               JAN-2007 $ 75  OBG-MO
                            PC SEP-2004 $ 85  OMC-JQ



New Portfolio Plays

None


New Watchlist Plays

None


Drops

None


*******************
SPREADS & STRADDLES
*******************

Buyers Take Extended Holiday...
By Ray Cummins

Stocks moved lower again Tuesday amid a glut of earnings warnings
in the technology segment and a spike in crude oil prices.

The Dow Jones Industrial Average closed down 63 points at 10,219,
with all but 6 of the 30 blue-chip components moving lower.  The
NASDAQ Composite fared worse on a percentage basis, declining 43
points to 1,963, as semiconductor shares plunged.  The S&P 500
Index fell 9 points to 1,116 with only energy stocks bucking the
downtrend on the back of higher oil prices.  Decliners outpaced
advancers by a 3 to 2 margin on the New York Stock Exchange, and
by a 3 to 1 margin on the NASDAQ.  Volume was 1.28 billion on the
Big Board and 1.9 billion on the technology exchange.  Bonds were
lower with the 10-year benchmark note edging down 5/32 while its
yield climbed to 4.47%.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SUMMARY OF CURRENT POSITIONS - AS OF 07/05/04
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of our subscribers, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are simply a service to
help new traders understand when positions might be opened and
closed.  In most cases, actions taken based on the commentary
would be far too late to be effective, thus it is not intended
as a substitute for personal trade management nor does it in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.


PUT-CREDIT SPREADS

Stock   Pick   Last   Month L/P  S/P Credit   CB     G/L   Status

AMZN    50.95  52.59   JUL   42  45   0.30   44.70   0.30   Open
YHOO    31.87  33.94   JUL   25  27   0.30   27.20   0.30   Open
CFC     69.15  71.43   JUL   60  63   0.35   63.03   0.35   Open
QCOM    69.86  72.27   JUL   60  65   0.45   64.55   0.45   Open
SWIR    33.83  36.53   JUL   25  30   0.90   29.10   0.90   Open
CTSH    24.25  24.76   JUL   20  22   0.27   22.23   0.27   Open
NUE     69.54  73.85   JUL   60  65   0.75   64.25   0.75   Open
SII     53.26  56.76   JUL   47  50   0.30   49.70   0.30   Open
MXIM    51.62  49.22   JUL   45  50   0.70   49.30  (0.08)  Open?
RJR     65.90  66.74   JUL   55  60   0.35   59.65   0.35   Open
PHTN    34.93  31.40   JUL   30  32   0.30   32.20  (0.80) Closed
URBN    60.80  61.64   JUL   50  55   0.40   54.60   0.40   Open
AMZN    53.71  52.59   JUL   47  50   0.30   49.70   0.30   Open
PLT     42.39  41.88   JUL   35  40   0.50   39.50   0.50   Open

L/P = Long Put  S/P = Short Put  CB = Cost Basis  G/L = Gain/Loss

The position in Ishares Russell 2000 Index (IWM) was not available
at the recommended price.  Photon Dynamics (NASDAQ:PHTN) suffered
the fate of most semiconductor equipment stocks and conservative
traders should close the bullish spread to limit potential losses.
Maxim Integrated Products (NASDAQ:MXIM) is also a candidate for
early exit.


CALL-CREDIT SPREADS

Stock   Pick   Last   Month  LC  SC  Credit   CB     G/L   Status

APPX    34.03  29.07   JUL   45  40   0.50   40.50   0.50   Open
INSP    34.71  36.61   JUL   45  40   0.65   40.65   0.65   Open
WMS     28.75  30.30   JUL   35  30   0.65   30.65   0.35   Open?
GS      90.21  93.61   JUL  100  95   0.70   95.70   0.70   Open
SYMC    42.42  42.94   JUL   50  45   0.65   45.65   0.65   Open
FRX     56.32  57.21   JUL   65  60   0.60   60.60   0.60   Open
CTX     47.34  46.01   JUL   52  50   0.30   50.30   0.30   Open
SINA    35.60  30.80   JUL   45  40   0.45   40.45   0.45   Open
CECO    44.45  42.25   JUL   55  50   0.55   50.55   0.55   Open
RYL     75.80  78.96   JUL   85  80   0.60   80.60   0.60   Open

L/C = Long Call  S/C = Short Call  CB = Cost Basis  G/L = Gain/Loss

WMS Industries (NYSE:WMS) has continued to recover this week and
is now a candidate for early exit.  Ryland Group (NYSE:RYL) and
Goldman Sachs (NYSE:GS) are on "watch" list.  Positions in Genzyme
(NASDAQ:GENZ) and the Oil Service Holdrs (AMEX:OIH) have previously
been closed to limit potential losses.


DEBIT STRADDLES

Stock   Pick   Last   Exp.   Long  Long  Initial   Max     Play
Symbol  Price  Price  Month  Call  Put    Debit   Value   Status

GRMN    32.60  34.41   JUL    35    30     2.15    2.35    Open?
SNDK    22.90  20.93   JUL    22    22     3.40    3.60    Open
GDT     56.02  55.03   JUL    55    55     4.80    4.50    Open
DNA     54.60  55.35   JUL    55    55     4.25    4.10    Open
OVTI    15.50  14.68   JUL    15    15     2.70    4.00    Open
MDC     64.77  64.39   JUL    65    65     4.00    4.50    Open

M.D.C. Holdings (NYSE:MDC) may have been a difficult position to
enter (on a simultaneous order basis), due to the volatility on
Monday, however that straddle, along with Omnivision (NASDAQ:OVTI)
and Sandisk (NASDAQ:SNDK) has offered a small profit.  With the
market in a trading range, there has been very little noteworthy
activity in the debit straddles portfolio.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
NEW POSITIONS
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As with
any new investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your personal skill level, risk-reward tolerance
and portfolio outlook.  In addition, we recommend that you avoid
any trading techniques in which you are not completely comfortable
with the potential capital loss, the necessary adjustments, and
the common entry-exit strategies.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BULLISH PLAYS - CREDIT SPREADS

These candidates are based on the underlying issue's technical
history or trend.  The probability of profit in these positions
may also be higher than other plays in the same strategy, due to
small disparities in option pricing however, each play should be
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and trading style.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

POT - Potash  $98.08  *** New All-Time High! ***

Potash Corporation of Saskatchewan (NYSE:POT) is an integrated
fertilizer and related industrial and feed products company.  It
is also a producer of nitrogen products worldwide.  The firm's
phosphate operations include the manufacture and sale of solid
and liquid phosphate fertilizers, animal feed supplements and
purified phosphoric acid.  The company's nitrogen operations
involve the production of nitrogen fertilizers and nitrogen
feed and industrial products, including ammonia, urea, nitrogen
solutions, ammonium nitrate and nitric acid.  The company also
manufactures, processes and distributes fertilizer and other
agricultural supplies.

POT - Potash  $98.08

PLAY (conservative - bullish/credit spread):

BUY  PUT  AUG-85.00  POT-TQ  OI=300  ASK=$0.50
SELL PUT  AUG-90.00  POT-TR  OI=95   BID=$1.00
INITIAL NET-CREDIT TARGET=$0.55-$0.65
POTENTIAL PROFIT(max)=12% B/E=$89.45


__________________________________________________________________

UOPX - Univ. of Phoenix Online  $89.09  ** Volatility = Premium **

University of Phoenix Online (NASDAQ:UOPX) is the computerized,
digital delivery system of the University of Phoenix.  It is a
provider of accessible, accredited educational programs for
working adults. It offers programs in business, education,
information technology and nursing.  A student can participate
in University of Phoenix Online's classes through a personal
computer, a modem and an Internet service provider.  University
of Phoenix is part of Apollo Group, which is its parent company.

UOPX - Univ. of Phoenix Online  $89.09

PLAY (conservative - bullish/credit spread):

BUY  PUT  AUG-75.00  UBY-TO  OI=0   ASK=$0.80
SELL PUT  AUG-80.00  UBY-TP  OI=59  BID=$1.35
INITIAL NET-CREDIT TARGET=$0.60-$0.65
POTENTIAL PROFIT(max)=14% B/E=$79.40



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BEARISH PLAYS - CREDIT SPREADS

All of these positions are favorable candidates for "bear-call"
credit spreads, based on the current price or trading range of
the underlying issue and its recent technical history or trend.
The probability of profit from these positions may be higher
than other plays in the same strategy, due to disparities in
option pricing.  However, current news and market sentiment will
have an effect on these issues, so review each play individually
and make your own decision about its future outcome.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

MERQ - Mercury Interactive  $46.17  *** Revenge Play! ***

Mercury Interactive (NASDAQ:MERQ) is a provider of integrated
performance management solutions that enable businesses to test
and monitor their Web-based applications.  Its software products
and hosted services help Global 2004 companies enhance the user
experience by improving performance, availability, reliability
and scalability in their Web-based applications.  Its many hosted
services provide its customers with a cost-effective solution that
quickly meets business needs without dedicating significant time
and internal resources.  Its integrated performance management
solutions enable customers to more quickly identify and correct
problems before users experience them.  The company also provides
outsourced load testing and Web performance monitoring services
that complement its software products.

MERQ - Mercury Interactive  $46.17

PLAY (conservative - bearish/credit spread):

BUY  CALL  AUG-55.00  RQB-HK  OI=814   ASK=$0.25
SELL CALL  AUG-50.00  RQB-HJ  OI=1803  BID=$0.85
INITIAL NET-CREDIT TARGET=$0.65-$0.70
POTENTIAL PROFIT(max)=15% B/E=$50.65


__________________________________________________________________

SMH - Semiconductor Holdrs Trust  $34.58  *** Weak Sector! ***

The Semiconductor Holdrs Trust (AMEX:SMH) is a unique instrument
that represents an investor’s ownership in the stock of specified
companies in the semiconductor sector.  HOLDRS allow investors to
own a diversified group of stocks in a single investment that is
highly transparent, liquid and efficient.  Each HOLDR is a fixed
basket of 20 stocks (except the Telebras HOLDR, which holds 12
companies).  They work operate much like ADRs; American Depositary
Receipts, which allow U.S. investors to purchase foreign-owned
companies on the U.S. exchanges in dollar denominated amounts.  In
just the same way, the investor actually owns the shares of each
underlying company, receives dividends, proxies, and annual reports
from each.  The HOLDRs are not managed, and once the companies and
amounts have been determined they are fixed, no companies will be
substituted.  In this way, the HOLDRs differ somewhat from Spiders
(SPDRs), or Standard & Poor Depositary Receipts and other exchange
traded funds, which will add and delete stocks on a regular basis,
usually in conjunction with an index that they are tracking.

A complete explanation of this issue, including the companies that
make up each HOLDRS' particular industry, sector or group can be
found here:

http://www.holdrs.com/holdrs/main/index.asp?Action=Definition

SMH - Semiconductor Holdrs Trust  $34.58

PLAY (conservative - bearish/credit spread):

BUY  CALL  AUG-40.00  SMH-HH  OI=19459  ASK=$0.15
SELL CALL  AUG-37.50  SMH-HU  OI=34464  BID=$0.45
INITIAL NET-CREDIT TARGET=$0.30-$0.35
POTENTIAL PROFIT(max)=14% B/E=$37.80



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
STRADDLES AND STRANGLES
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Based on analysis of the historical option pricing and technical
background, these positions meet the fundamental criteria for
favorable volatility-based plays.
__________________________________________________________________

No straddles or strangles today...

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

SEE DISCLAIMER - SECTION 1

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~


*****************************************
PREMIUM-SELLING PLAYS: NAKED PUTS & CALLS
*****************************************

All of these issues have robust option premiums and favorable
technical indications.  However, current news and events as
well as market sentiment, will have an effect on these stocks
so review each position thoroughly and make your own decision
about its outcome.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SUMMARY OF CURRENT POSITIONS - AS OF 07/05/04
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of our subscribers, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are simply a service to
help new traders understand when positions might be opened and
closed.  In most cases, actions taken based on the commentary
would be far too late to be effective, thus it is not intended
as a substitute for personal trade management nor does it in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.


MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE

The Maximum Yield (listed in the summary and with "naked" option
selling plays) is the greatest possible profit available in the
position.  This amount, expressed as a percentage, is based on
the initial margin requirement as determined by the Board of
Governors of the Federal Reserve, the U.S. options markets and
other self-regulatory organizations.  Although increased margin
requirements may be imposed either generally or in individual
cases by various brokerage firms, our calculations use the widely
accepted margin formulas from the Chicago Board Options Exchange.
The "Simple Yield" is based on the cost of the underlying issue
(in the event of assignment), including the premium from the sold
option, thus it reflects the maximum potential loss in the trade.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

NAKED PUTS

Stock   Strike Strike Cost   Current   Gain    Max    Simple
Symbol  Month  Price  Basis   Price   (Loss)  Yield   Yield

CVTX     JUL    15    14.60   16.47    0.40   5.63%   2.74%
DITC     JUL    17    16.80   22.04    0.70   8.40%   4.17%
SYNA     JUL    17    16.85   17.89    0.65   7.48%   3.86%
PTIE     JUL     7     7.15    8.02    0.35   9.89%   4.90%
BCC      JUL    35    34.25   37.26    0.75   5.12%   2.19%
JILL     JUL    20    19.45   23.61    0.55   6.72%   2.83%
LSS      JUL    20    19.50   27.97    0.50   6.07%   2.56%
OI       JUL    15    14.65   16.00    0.35   5.64%   2.39%
NVTL     JUL    15    14.65   25.52    0.35   7.34%   2.39%
PDII     JUL    25    24.70   29.98    0.30   3.91%   1.21%
RSAS     JUL    17    17.05   19.70    0.45   6.22%   2.64%
STLD     JUL    25    24.45   28.03    0.55   5.33%   2.25%
UPL      JUL    30    29.55   37.23    0.45   4.14%   1.52%
USG      JUL    15    14.15   17.31    0.85  13.32%   6.01%
ATI      JUL    12    12.20   17.49    0.30   7.44%   2.46%
BJS      JUL    42    41.70   46.00    0.80   4.75%   1.92%
LCAV     JUL    25    24.35   28.34    0.65   6.85%   2.67%
NCRX     JUL    27    26.80   31.05    0.70   7.30%   2.61%
NVTL     JUL    17    17.05   25.52    0.45   8.97%   2.64%
SSYS     JUL    22    22.20   24.04    0.30   4.41%   1.35%
SWIR     JUL    30    28.85   36.53    1.15  10.66%   3.99%
SYNA     JUL    17    16.90   17.89    0.60   8.98%   3.55%
YHOO     JUL    30    29.20   33.94    0.80   6.80%   2.74%
AMHC     JUL    22    21.80   27.07    0.70   9.36%   3.21%
CTSH     JUL    22    22.20   24.76    0.30   4.34%   1.35%
CYBX     JUL    30    29.25   32.56    0.75  10.31%   2.56%
ERES     JUL    22    21.85   27.62    0.65   9.03%   2.97%
HLEX     JUL    15    14.65   16.28    0.35   7.40%   2.39%
MINI     JUL    20    19.65   27.50    0.35   5.89%   1.78%
NFI      JUL    30    29.30   39.22    0.70   9.77%   2.39%
PTIE     JUL     7     7.25    8.02    0.25  11.96%   3.45%
RIMM     JUL    50    49.15   70.91    0.85   6.57%   1.73%
SGTL     JUL    22    22.25   26.71    0.25   4.25%   1.12%
BRCM     JUL    40    39.30   43.15    0.70   6.43%   1.78%
CSGP     JUL    40    39.60   45.92    0.40   3.49%   1.01%
DHB      JUL    12    12.20   15.41    0.30   8.97%   2.46%
DY       JUL    25    24.65   27.60    0.35   4.63%   1.42%
ERES     JUL    22    22.20   27.62    0.30   4.97%   1.35%
FWHT     JUL    20    19.60   21.41    0.40   6.89%   2.04%
GVHR     JUL    22    22.20   26.02    0.30   5.07%   1.35%
IMH      JUL    20    19.75   22.11    0.25   4.41%   1.27%
NVTL     JUL    17    16.90   25.52    0.60  15.07%   3.55%
PLMO     JUL    25    24.55   34.66    0.45   7.28%   1.83%
USG      JUL    15    14.70   17.31    0.30   7.05%   2.04%
BCC      JUL    35    34.55   37.26    0.45   5.53%   1.30%
CHIC     JUL    20    19.65   20.90    0.35   7.68%   1.78%
CENX     JUL    22    22.00   24.29    0.50   9.64%   2.27%
ENDP     JUL    22    22.15   23.16    0.35   6.56%   1.58%
IFIN     JUL    37    37.05   42.98    0.45   5.93%   1.21%
STTX     JUL    22    22.05   21.17   (0.88)  0.00%   0.00% *
TASR     JUL    30    29.65   44.30    0.35   6.39%   1.18%
USG      JUL    15    14.70   17.31    0.30  10.67%   2.04%
VSAT     JUL    22    22.20   25.05    0.30   5.67%   1.35%
AMED     JUL    30    29.50   29.24   (0.26)  0.00%   0.00%
CIMA     JUL    30    29.60   33.78    0.40   6.65%   1.35%
ERES     JUL    25    24.70   27.62    0.30   6.05%   1.21%
ISRG     JUL    17    17.25   18.67    0.25   7.04%   1.45%
MU       JUL    15    14.70   14.68   (0.02)  0.00%   0.00%
NFLX     JUL    30    29.45   32.31    0.55   9.80%   1.87%
NSM      JUL    20    19.80   20.31    0.20   4.91%   1.01%
NKTR     JUL    17    17.15   19.46    0.35  10.49%   2.04%
SWIR     JUL    30    29.75   36.53    0.25   5.32%   0.84%
XMSR     JUL    25    24.65   27.83    0.35   6.82%   1.42%

Steel Technologies (NASDAQ:STTX) and Amedisys (NASDAQ:AMED)
are candidates for "early-exit" and Micron (NYSE:MU) has
suffered from the selling pressure in chip stocks.  A number
of issues are on the "watch" list after the Friday's retreat
in technology shares.


NAKED CALLS

Stock   Strike Strike Cost   Current   Gain    Max    Simple
Symbol  Month  Price  Basis   Price   (Loss)  Yield   Yield

AMLN     JUL    25    25.35   23.05    0.35   5.29%   1.38%
ICOS     JUL    30    30.45   29.84    0.45   5.26%   1.48%
OIIM     JUL    17    17.80   15.65    0.30   5.50%   1.69%
INSP     JUL    40    40.50   36.61    0.50   6.88%   1.23%
RHAT     JUL    25    25.60   22.18    0.60   9.08%   2.34%
XMSR     JUL    27    27.75   27.83   (0.08)  0.00%   0.00% *
CECO     JUL    65    65.90   42.25    0.90   7.19%   1.37%
ESI      JUL    45    45.50   37.90    0.50   5.47%   1.10%
FMT      JUL    20    20.40   17.85    0.40   8.75%   1.96%
NBIX     JUL    55    56.10   50.73    1.10   8.21%   1.96%
SLAB     JUL    50    50.75   43.73    0.75   6.39%   1.48%
AGIX     JUL    20    20.45   18.78    0.45   9.16%   2.20%
LEND     JUL    30    30.55   27.41    0.50   6.63%   1.64%
TSS      JUL    22    22.90   21.51    0.40   8.67%   1.75%
PAYX     JUL    35    35.40   33.34    0.40   4.97%   1.13%
FEIC     JUL    25    25.35   23.32    0.35   6.89%   1.38%
WM       JUL    40    40.30   38.25    0.30   3.79%   0.74%
IPXL     JUL    20    20.40   19.12    0.40  10.18%   1.96%
PSFT     JUL    20    20.25   17.21    0.25   6.99%   1.23%

As mentioned on Tuesday, a new stock on the "early-exit" list
is XM Satellite Radio (NASDAQ:XMSR), which has reversed course
during the last few sessions and appears to be "bullish" in
the near-term.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
NEW POSITIONS
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As with
any new investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your personal skill level, risk-reward tolerance
and portfolio outlook.  In addition, we recommend that you avoid
any trading techniques in which you are not completely comfortable
with the potential capital loss, the necessary adjustments, and
the common entry-exit strategies.  The positions with "*" will be
included in the weekly summary.  Those with "TS" (Target-Shoot)
are below our minimum monthly return, but may offer a favorable
entry price with a limit order, due to the daily volatility of
the underlying issue.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL!

The sale of uncovered puts entails considerable financial risk,
far more than the initial margin or collateral required to open
a position.  The maximum financial obligation for the sale of a
naked put is the strike price (of the underlying stock) that is
sold.  Although this obligation is reduced by the premium from
the sale of the option, a writer of puts should have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  In addition, there is one very important rule when using
this strategy: Don't sell puts on stocks that you don't want to
own!  Why?  Because stocks occasionally experience catastrophic
declines, exponentially increasing the margin maintenance and
possibly causing a devastating shortfall in your portfolio.  It
is also important that you consider using trading stops on naked
option positions to help limit losses when a stock's price falls.
Many professional traders suggest closing the position when the
underlying share value moves below the sold strike, or using a
"buy-to-close" stop order at a price that is no more than twice
the original premium received from the sold option.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

NEW NAKED-PUT CANDIDATES

Stock  Last    Option    Option Last Open Cost  Days Simple Max
Symbol Price   Series    Symbol Bid  Int. Basis Exp. Yield  Yield

CRDN   38.36  JUL 35.00  AUE SG 0.30  768 34.70  10   2.6%   7.4%
SCHN   34.42  AUG 30.00  SNQ TF 1.00  625 29.00  45   2.3%   6.5%
NVTL   25.16  AUG 20.00  NVU TD 0.50   11 19.50  45   1.7%   6.1%
MGAM   27.58  AUG 25.00  QMG TE 0.75   23 24.25  45   2.1%   5.5%
FRO    35.31  AUG 30.00  FRO TF 0.70   68 29.30  45   1.6%   5.0%
TASR   44.50  AUG 30.00  QUR TF 0.70 3401 29.30  45   1.6%   4.9%
NFI    40.31  AUG 30.00  NFI TF 0.60  808 29.40  45   1.4%   4.7%
GIVN   36.21  AUG 30.00  QPG TF 0.55  409 29.45  45   1.3%   4.2%
EYET   44.62  AUG 35.00  QUJ TG 0.55   20 34.45  45   1.1%   3.9%


Company Descriptions

LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without
margin), MY-Maximum Yield (monthly basis - using margin).

__________________________________________________________________

CRDN - Ceradyne  $38.36  *** Near All-Time Highs! ***

Ceradyne (NASDAQ:CRDN) develops, manufactures and sells advanced
technical ceramic products and components for defense, industrial,
automotive and commercial applications.  The company's primary
products include lightweight ceramic armor for soldiers and
military helicopters; aesthetic ceramic orthodontic brackets;
durable, reduced friction, ceramic diesel engine components;
ceramic-impregnated dispenser cathodes for microwave tubes,
lasers and cathode ray tubes, and ceramic industrial components
for erosion and corrosion resistant applications.

CRDN - Ceradyne  $38.36

JUL 35.00 AUE SG LB=0.30 OI=768 CB=34.70 DE=10 TY=2.6% MY=7.4%


__________________________________________________________________

SCHN - Schnitzer Steel  $34.42  *** Rally Mode! ***

Schnitzer Steel Industries (NASDAQ:SCHN) collects, processes and
recycles metals by operating a metals recycling business in the
United States.  The company also owns a chain of self-service
auto parts stores in the United States, operating under the name
of Pick-N-Pull, and is also a maker of finished steel products at
its technologically advanced steel mini-mill.  As a result of its
vertically integrated business, Schnitzer is able to transform
obsolete or wrecked auto bodies and other unprocessed metals into
finished steel products.  In addition, it is a partner in joint
ventures that are either in the metals recycling business or are
suppliers of unprocessed metals.  The company owns interests in
five joint ventures that are engaged in buying, processing and
selling primarily ferrous metal.  Another joint venture is an
industrial plant demolition contractor that dismantles industrial
plants, performs environmental remediation and sells recovered
metals and machinery.

SCHN - Schnitzer Steel  $34.42

AUG 30.00 SNQ TF LB=1.00 OI=625 CB=29.00 DE=45 TY=2.3% MY=6.5%


__________________________________________________________________

NVTL - Novatel Wireless  $25.16  *** Entry Point? ***

Novatel Wireless (NASDAQ:NVTL) is a provider of wireless data
access solutions, including wireless data modems and software,
for use with portable personal computers (PCs) and with handheld
computing devices.  The company delivers comprehensive solutions
that help businesses and consumers to access personal, corporate
and public information through e-mail, enterprise networks and
the Internet.  Novatel also offers wireless data modems as well
as custom software and hardware engineering services and systems
integration services to its customers to facilitate use of its
products.

NVTL - Novatel Wireless  $25.16

AUG 20.00 NVU TD LB=0.50 OI=11 CB=19.50 DE=45 TY=1.7% MY=6.1%


__________________________________________________________________

MGAM - Multimedia Games  $27.58  *** Next Leg Up? ***

Multimedia Games (NASDAQ:MGAM) is the leading supplier of
interactive electronic games and player stations to the rapidly
growing Native American gaming market.  The company's games are
delivered through a telecommunications network that links its
player stations with one another both within and among gaming
facilities.  Multimedia Games designs and develops networks,
software and content that provide its customers with a range of
gaming systems.  The company's development and marketing efforts
focus on Class II gaming systems and Class III video lottery
systems for use by Native American tribes throughout the United
States.

MGAM - Multimedia Games  $27.58

AUG 25.00 QMG TE LB=0.75 OI=23 CB=24.25 DE=45 TY=2.1% MY=5.5%


__________________________________________________________________

FRO - Frontline  $35.31  *** Hot Sector!  ***

Frontline (NYSE:FRO) is a Bermuda-based shipping company engaged
primarily in the ownership and international operation of oil
tankers, including oil/bulk/ore (OBO) carriers.  The company
operates tankers of two sizes: very-large crude carriers, which
are between 200,000 and 320,000 deadweight tons, and Suezmaxes,
which are vessels between 120,000 and 170,000 deadweight tons.
The company is also involved in the charter, purchase and sale
of vessels.

FRO - Frontline  $35.31

AUG 30.00 FRO TF LB=0.70 OI=68 CB=29.30 DE=45 TY=1.6% MY=5.0%


__________________________________________________________________

TASR - TASER International  $44.50  *** Premium-Selling! ***

TASER International (NASDAQ:TASR) develops and manufactures a
range of less-lethal self-defense devices.  The firm's primary
product lines include the ADVANCED TASER and the TASER X26, a
recently introduced weapon system offering a new "shaped pulse"
technology, and a smaller form factor.

TASR - TASER International  $44.50

AUG 30.00 QUR TF LB=0.70 OI=3401 CB=29.30 DE=45 TY=1.6% MY=4.9%


__________________________________________________________________

NFI - NovaStar Financial  $40.31  *** More Premium-Selling! ***

NovaStar Financial (NYSE:NFI) is a specialty finance firm that
originates, invests in and services residential nonconforming
loans.  The company offers a range of mortgage loan products to
borrowers (nonconforming borrowers) that usually do not satisfy
the credit, collateral, documentation or underwriting standards
prescribed by conventional mortgage lenders and loan buyers.

NFI - NovaStar Financial  $40.31

AUG 30.00 NFI TF LB=0.60 OI=808 CB=29.40 DE=45 TY=1.4% MY=4.7%


__________________________________________________________________

GIVN - Given Imaging  $36.21  *** Diagnostic Devices ***

Given Imaging (NASDAQ:GIVN) is an Israeli company established to
develop, produce and market a platform technology for diagnostics
and therapy of the gastrointestinal (GI) tract.  The company was
founded to commercialize a minimally invasive, disposable imaging
capsule for diagnosing small intestine disorders and diseases.
Given has submitted more than 20 patents worldwide for the tech-
nologies employed in the Given Diagnostic Imaging System, and for
new capsules to be developed using the basic technological plat-
form.  Future generations of the Given Diagnostic Imaging System
will be developed to capture images of the rest of the upper GI
tract and the large intestine.

GIVN - Given Imaging  $36.21

AUG 30.00 QPG TF LB=0.55 OI=409 CB=29.45 DE=45 TY=1.3% MY=4.2%


__________________________________________________________________

EYET - Eyetech Pharmaceuticals  $44.62  *** Uptrend Intact! ***

Eyetech Pharmaceuticals (NASDAQ:EYET) is a biopharmaceutical firm
that specializes in the development and commercialization of novel
therapeutics to treat diseases of the eye.  Its initial focus is
on diseases affecting the back of the eye, particularly the retina.
The company's most advanced product candidate is Macugen, which it
is developing for wet age-related macular degeneration (AMD) and
diabetic macular degeneration (DME).

EYET - Eyetech Pharmaceuticals  $44.62

AUG 35.00 QUJ TG LB=0.55 OI=20 CB=34.45 DE=45 TY=1.1% MY=3.9% *TS*



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BEARISH PLAYS - NAKED CALLS

Based on analysis of option pricing and the underlying stock's
technical background, these positions meet our fundamental
criteria for bearish "premium-selling" strategies.  Each issue
has robust option premiums, a well-defined resistance area and
a high probability of remaining below the target strike prices.
As with any recommendations, these positions should be carefully
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and personal trading style.

WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL!

The sale of uncovered calls entails considerable financial risk,
far more than the initial margin or collateral required to open
the position.  The maximum financial obligation for the sale of a
naked option is the strike price (of the underlying stock) that
is sold.  Although this obligation is reduced by the premium from
the sale of the option, a writer of options must have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  The simple fact is: stocks often experience large price
swings, exponentially increasing the margin maintenance and very
possibly causing a devastating shortfall in your portfolio.  It
is also important that you consider using trading stops on naked
option positions to help limit losses when a stock price moves in
a volatile manner.  Many professional traders suggest closing the
position when the underlying share value moves beyond the sold
strike, or using a "buy-to-close" stop order at a price that is no
more than twice the original premium received from the sold option.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

ISIL - Intersil  $17.76  *** New 2004 Low! ***

Intersil (NASDAQ:ISIL) is a global designer and manufacturer of
high-performance analog integrated circuits.  The company's
products are designed primarily to addresses applications in
four end markets: High-End Consumer, Computing, Communications,
and Industrial, including Intersil's Elantec line of operational
amplifiers, bridge driver power management products, interface
and analog switches and multiplexers and other standard analog
products.

ISIL - Intersil  $17.76

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  AUG 20    UFH HD     127   0.45  20.45   5.7%   2.2%


__________________________________________________________________

MACR - Macromedia  $21.82  *** Trend Reversal? ***

Macromedia (NASDAQ:MACR) is an independent software company
providing software that empowers designers, developers and
business users to create and deliver effective user experiences
on the Internet, fixed media and wireless and digital devices.
The company's integrated family of technologies enables the
development of Internet solutions, including Websites, rich
media content and Internet applications across multiple
platforms and devices.

MACR - Macromedia  $21.82

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  AUG 25    MRQ HE     998   0.40  25.40   4.5%   1.6%


__________________________________________________________________

MRVL - Marvell Technology Group  $23.64  *** Sector Slump! ***

Marvell Technology Group (NASDAQ:MRVL) is a global semiconductor
provider of high-performance analog, mixed signal and digital
signal processing integrated circuits.  The company offers its
customers a range of integrated circuit solutions using its
communications mixed-signal processing (CMSP) and digital signal
processing technologies.  Marvell applies its analog, mixed
signal, digital signal processing and complex digital design
technologies in a variety of applications.  Its product portfolio
consists of storage, switching, transceivers, wireless, personal
computers connectivity, gateways, communications controllers and
power management products.

MRVL - Marvell Technology Group  $23.64

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  AUG 27.5  UVM HY    3177   0.35  27.85   4.0%   1.3%



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

SEE DISCLAIMER - SECTION 1

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~


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

Dow Theory and Technical Analysis: Dous (2)
By Leigh Stevens
lstevens@OptionInvestor.com

I discussed Charles Dow's stock market theory in my last Trader's
Corner article as it relates to the averages needing to "confirm"
each other.  When either the Dow Industrials (INDU) or the Dow
Transportation average (TRAN) goes to new closing peak, the other
should do likewise within a few weeks to, at most, a few months.
Otherwise, the market trend should be watched closely for signs
that the major trend could be changing.  See –
http://www.OptionInvestor.com/traderscorner/tc_062904_2.asp

The Dow Transportation average made a new high on 6/30/04 at
3204.3, but the Dow 30 Industrials (INDU) was far from doing the
same.  According to the way Dow saw it, a bull market is not
"confirmed" unless INDU closes above 10,737.7, its prior closing
peak made 2/11/04.  This does not mean that if a higher closing
high fails to happen that this means investors should get out of
stock investments or makes this a bear market. I am speaking more
about an "alert" here – as in, pay closer attention. At some
point the Dow 30 needs to achieve a higher high for a follower of
Dow theory to stay bullish on the major trend.

I also mentioned in this prior article that there was more that
Dow contributed to technical analysis than the above. Charles Dow
was also the first to formulate some key principles about how the
market behaved and about market psychology.

THE MARKET DISCOUNTS EVERYTHING
Dow determined which stocks; the ones making up his averages,
that best represented the overall market. Every possible fact and
factor relating to the price of any individual stock within an
average is quickly priced into the current traded price of that
stock and into the averages. Without this quality of effectively
discounting everything, technical analysis wouldn't make sense or
"work". Prices tomorrow, next week and next month would be more
random and it would be impossible to project future trends based
on present and past market action and patterns.

So, as formulated by Dow, a traded price for a stock (and by
extension, for an index) reflects all knowledge that exists about
a company (or the economy) and its current and future prospects
in terms of individual (or overall earnings).

Even so-called "insider" information on a particular company will
show up in the price and volume patterns that can be seen by
astute observers of the trading in that stock – why?  Because
those who know will buy or sell the stock at a level that tends
to cause a rise in average daily volume. As this group acts on
that information, that activity will become apparent to an ever-
widening group.  This principle is even truer today, given the
extremely rapid and widespread distribution of information that
occurs on the financial channels and on the Internet.

CYCLES OF BULL AND BEAR MARKETS HAVE THE SAME REOCCURING PHASES
The phases of both bull and bear markets, while different
depending on whether it’s a bull market or a bear market, are
similar in terms of two factors:
- Relative knowledge about the market
- Investor "sentiment" (attitude) about the market that ranges
from disinterested to indifferent to interested; with varying
degrees of intensity within disinterested and interested

BULL MARKETS –
A bull market comes after a lengthily and substantial decline in
stock values that comes about due to a downturn in the economy or
a recession. Sound familiar?  Major market advances are usually,
but not always, divided into 3 phases.  These phases are marked
by who participates in them and what these market participants
are doing in each phase.

1. ACCUMULATION
In the first phase, there is "accumulation" or buying over a
period of time, during which very knowledgeable investors with
good foresight about a coming business upturn, are willing to
start buying stocks offered by pessimistic sellers who want out.




This group of "savvy" investors will also start to pay higher
prices as the willing sellers exit.  The economy and business
conditions are still often quite negative.  Remember the end of
2002/early 2003 – a time of stagnant growth and continuing
layoffs and job losses.

The "public", and this is mirrored by the financial press, is
quite disinterested in the market, to the point of where owning
stocks is very unattractive to them and they are out of the
market. Investors and traders who got "burned", so to speak, by
hanging on in the bear market or kept buying too soon, are
acutely disgusted with the market. I'm not talking about holders
of index puts but investors holding stocks in their 401k's and in
mutual funds. Market activity is modest at best but is picking up
a bit on rallies, but this is mostly only noticed, if at all, by
professional market participants.

2. A STEADY CLIMB
The second phase is one of a fairly steady advance, but one that
is not dramatic.  There is a pickup in business and encouraging
economic reports as an improving economy leads to a pick up in
corporate earnings.  This phase is also a phase where money can
be made relatively safely, as technical indicators turn positive
and there tends to be an absence of volatile trading swings.

The 2003 Market provides an example of "phase" two –



3.  MAIN STREET ADOPTS WALL STREET
The third phase, which we have not seen yet – stay tuned as to if
and when this market goes on to this phase.  This phase of great
public participation can both be highly profitable and quite
risky, is marked by heavy "public" interest and participation in
the market.  The economic news is good during this period and
suddenly front pages of magazines have articles heralding the new
bull market.  The new issue market gets going as the public now
has an appetite for new companies.  We need only remember the
late-1990's here.

This is the phase where you will hear banter at parties about the
market, how well so and so is doing in stocks and where market-
related Internet chat rooms are quite active. Price advances can
be huge and volume matches.  The more speculative stocks continue
to advance but it is here that the "blue chip" stocks of the most
established big-name companies can start to lag.

Some sharp downswings occur among stocks that fall out of favor.
Speculation remains intense as seen in increased option activity,
the first-day closes of hot new issues and in the level of buying
stocks on margin.  The end of this phase is always the same,
varying degrees of collapse. This can come after a year or two or
even after several years have passed from the beginning phase.

BEAR MARKETS –
The animal analogy is quite apt, as the bear can both be very
fierce and unforgiving, or can just go to sleep for a long
period. Bear markets can also usually be divided into 3 phases.
That this does not always occur is seen in the '87 bear market
that was sharp and steep, but with the decline only lasting two
months.  After that, there was a slow gradual process of
advancing prices during which some bearish sentiment built up and
people swore off the market.  This phase didn’t reach the typical
bearish extremes however; as within 7-10 months the Dow had
recovered nearly half of its October-November decline.

However, a more typical Bear Market is the 3-year period from
late-1999/early-2000 to early-2003 –




1.  DISTRIBUTION
The first phase of a primary bear market tends to be a period of
"distribution".  This really begins in the final phases of the
bull market. It is the phase where selling begins by the type of
experienced investors that didn’t get overly swept up in the
extremes in emotion and price at the bull market peak – this
group are the more investors with more foresight and a more
balanced point of view. Many savvy investors sold a lot of stock
during 1999 and may have been early in doing do, but they had
only light holdings during the major decline that followed – true
even more so in the tech-heavy Nasdaq.

This knowledgeable group has the knowledge to understand when
company profits have probably reached their peak and that the
price multiples paid (P/E ratios) for those earnings are at
extreme levels.  They began to sell or "distribute" stocks to the
still eager and willing buyers.  Volume of trading begins to
slow.  The public is still in the market heavily but may be a bit
frustrated as the rate of increase slows down and not all stocks
participate on rallies.

The distribution phase I knew of from before 1999, having been
through two earlier such periods – one in a major silver and gold
bull market and bubble of the mid to late-70’s and in 1986 when
pretty knowledgeable people were net sellers of stocks in the
first half.

2. PANIC SELLING
Panic is a major characteristic of the second phase of a bear
market.  Buyers become scarce, bids falls sharply and sellers
become desperate to get out.  The downward acceleration becomes
extreme and a near vertical drop can ensue – at first, after
March 2000 in the Nasdaq, the decline was gradually, occurring
over weeks and months although there were some sharp down weeks,
especially in the beginning. But then in 2002 as you know, it got
pretty brutal as the market went into free fall – this became
very much the phase of discouragement which we’ll look at next.

In the late-summer of ’86 I sold some long call positions on the
morning of what was later called "black Monday" – I didn't have
the conviction to buy puts or to be short S&P index futures
however. My own bullish sentiment died hard and I couldn't
believe that the decline was going to be as severe as it was.  In
short, "excess" is the end result of excess.

A decline in the panic selling phase will tend to go on longer
when there is very strong conviction about the continuation of
the bull market that has ended already– the investing public, in
general, does not "believe" the potential severity of the bear
market or how they will eventually react to it.  The handmaiden
to fear, so speak, is hope.  There is a reluctance to take a loss
in stocks, especially a sizable one.  Better to hope for a
recovery.

This is the phase where people will make a point of telling you
that they are "long-term" investors.  Investors have become
conditioned to stocks going up and will maintain their faith in a
market rebound for longer than is warranted by facts.  Hope
springs eternal as is said.  You heard this sentiment expressed a
lot on the market media in 1999-2000 as investors interviewed
said they were going to hang tight.  Two years later most of them
were hung all right – with many finally out of stocks!

3. DISCOURAGMENT –
After the earlier and severe portions of the decline and often,
where prices are not dropping so steeply, will tend to come a
point where the economy has stabilized. Here, there can be a
gradual market recovery and a rebound in prices of the stocks of
the strongest companies. Or, this may be a long period where the
market trends sideways.  This is the third phase and is marked by
discouraged sellers as the market does not bounce back up or
gains just don’t hold (which is more typical of bull markets).
There are many investors that didn’t sell in the panic atmosphere
that had prevailed earlier but "give up" on stocks finally – this
is also the so-called "capitulation" phase.

Selling in the discouragement phase could also be coming from
those investors and traders who bought during and after the
steepest declines as they thought stocks looked cheap relative
the inflated values of the late bull market stage.  What causes
this discouraged selling is that the rallies aren’t sustained and
prices sink lower.  There’s an old analogy about the erosion of a
bear market being like a faucet dripping.  Such slow steady loss,
over time, becomes buckets.  Business conditions at this stage
may deteriorate further.  Certainly there is an absence of good
news with corporate earnings as the economy slides further.

The stocks that were very speculative, in terms of their
potential to make money, may lose most of the rest of the their
value in this phase.  There were many Nasdaq stocks that lost 80-
90% of what they had gained in the prior bull market, in
the 2 years after the March 2000 top.  Blue chip type stocks tend
to decline more slowly because investors hold on to them the
longest.

A bear market ends when all the possible bad news has been
discounted.  And it after it ends there is often even more
negative news that keeps coming.  Keep in mind that the
"discounting" mechanism of stocks is always also an attempt to
look ahead, so stock values will reflect the expectations of what
earnings could be when business conditions improve – for example,
about six months ahead.  It also should be noted that no two bear
markets are exactly alike.  The 1987 bear market was amazingly
short in time duration and could be measured in weeks, although
the price declines were quite severe.  Some bear markets skip the
panic stage and others end with it as in 1987.  Bear markets go
on for quite different time and price durations.

The key aspect to knowing how it all works – that however steep
the price swings are, such as was seen in spectacular last phase
of the tech bull market run up of 1998-2000 – keeping in mind the
characteristics of each phase will help you keep a level head.
You know what is coming when the "excess" phase you are in ends
and you can prepare for it.  Keep in mind also, that these
descriptions were made over 100 years ago.  I have added more up
to date examples, but the essential nature of the market phase
stems from human nature and this is the constant or what
doesn’t change much.  This relatively unchanged human nature,
ours and others, is what you have to deal with in the stock
market and it benefits us greatly when we can see which market
phase we are in.


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