Providing Independent "Buy Side" Research
February 2, 2003

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It was with a great deal of sadness that I watched the news unfold Saturday morning regarding the Columbia accident. Condolences to everyone who suffered a loss as a result of this. I believe the proper thing for us to d, is to determine the cause of the accident, correct it to ensure that it does not happen again, and to move forward with the space program. I believe that is what the seven astronauts we gave their lives would want. And we owe it to them to do so.

In the last couple of editions of the Sterling Weekly I have been watching and discussing General Electric (GE). I have felt that the pullback in the Dow Jones Industrial Average would create the opportunity to either acquire GE at a cheap price or generate some income through the sale of "Put Options" on GE. (Please see the January 17th edition of the Sterling Weekly for that article). General Electric closed Friday @ $23.10, and with that close on Friday our indicators pointed higher. As a result I am expecting GE to move higher and test $23.60 & then $24.35 per share. I have been following the February $22.50 & $25.00 Puts on GE, which closed at $0.55 & $2.05 respectively.

Since I am expecting GE to move higher, and I would like the opportunity possibly generate some cash in the process, my strategy would be to sell GE February 25 Puts for the $2.05 per contract on the open of trading on Monday. This will create 3 possible outcomes.

A) General Electric closes above $25.00/share. In that case we get to keep the $2.05 per share.

B) General Electric moves higher to my expected price targets and we get the chance to buy back the puts for a profit, keeping the difference between we sold them for and bought them back for.

C) General Electric moves lower and when the put options expire in a couple of weeks their owner exercises' them and sells GE to us at $25.00 per share. Our cost basis in GE would them be $22.95 per share, a price I would feel comfortable owning GE at. The following month we could then sell a Call Option on our position.

In my book, either one of these three scenarios is a good one.

The Dow Jones Industrial Average:

Last week I stated that I expected the Dow Jones Industrial Average to test the 8,000 level. On Friday the Dow broke through 8,000 on an intraday basis and traded as low as 7,917.16 The Dow Jones Industrial Average closed Friday at 8,053.81 up 108.68 points on the day.


The good news for the week, is that it appears there is a downward sloping trendline that is providing support at these levels. This could provide a point for the Dow to rally from. The problem is that there are several gaps on the chart of the Dow Jones Industrial Average that were created as the market moved higher from its October lows. The "Rule of Thumb" on gaps is that a stock or index will always retrace its movement and go back and fill the gaps, regardless of how long it takes. Better to do it now, than further down the road. The lowest of these gaps was on October 11, 2002 when the Dow gapped higher from its previous day's close of 7,533.95 however, with Friday's close our indicators pointed higher. I am expecting the Dow Jones to move higher from these levels. If it is up again Monday, then a "Buy Signal" should be generated. The Bottom Line: The Dow Jones Industrial Average should move higher.

Today's Opinion: Closed @ 8,053.81 Last Signal: Called Higher on Feb. 2, 2003 from January 31st closing level of 8,053.81 Current Expectations: The index should continue to move higher and test 8,303.78 and then 8,697.87

The S&P 500:

The S&P 500 closed Friday at 855.70 up 11.09 points. It appears that we may see a short term bottom forming in the S&P 500. Our indicators have turned higher and if the index is up again on Monday, then they will have generated a "Buy Signal".

Today's Opinion: Closed @ 855.70 Last Signal: Called higher on 2-2 with the close of 855.70 on January 31st. Current Expectations: Lower The index should test 875.40 and then 887.34 on a closing basis

The NASDAQ 100 (NDX)

In last week's edition of the Sterling Weekly I expected the NDX to move lower, and it did. The NDX closed at 983.05, down 13.13 points on the week. The NASDAQ 100 (NDX) closed Friday @ 983.05 down 2.46 points. In the process our indicators generated a "Buy Signal", and as a results I am expecting the NDX to move higher from these levels.

Current Opinion: Closed @ 983.05 Last Signal: Buy Signal on 1-31-03 @ 983.05 Current Expectations: The NDX should move Higher and test 1,032.67 and then 1,049.03

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