SEVENTEEN PERCENT IN JUST ONE DAY!

The market traded mostly flat last week but jumped big on Friday...

OUR NEW BULLISH TRADE ON AUTONATION (AN) JUMPED AS WELL ADDING SEVENTEEN PERCENT IN JUST ONE DAY!

That's great news and it looks like with the new funds appropriated by the Senate for the 'Cash for Clunkers' program AN will continue to rise making us some great profits on this new call position. Friday's gains were great but the big jump just brought back some of the value lost earlier in the week--but once again as the stock rises the profits on this one should mount up fast.

The rest of our plays continued to ride the bullish wave with just one exit on bearish position Goodrich (GR) as the stock climbed through our stop.

The markets continued their rise last week although the only real gains came on just one day--Friday. So what does that tell us about the strength of the overall market and how much longer might this rally last? To get a better idea and see where the opportunities may be hiding this week let's take a good look at...

WHICH WAY THIS MARKET IS HEADED

For four days last week the markets struggled to hold the 990 level only to see another short squeeze on Friday push the SPX over 1010. This has been the pattern for the past month with huge up-days on July 15, 23, 30 and then again this past Friday August 7. Unfortunately for the momentum players the big jumps are always followed by sideways trading.

The short squeeze generator for last week was the Non-Farm Payrolls report on Friday. The report showed the U.S. lost another -247,000 jobs in July but that was better than the consensus estimate of -320,000. It was also much better than the -467,000 jobs lost in June. The -467K June number was revised down to -433K in this report.

The really surprising news was the unemployment rate actually dropped to 9.4% from June's 27-year high of 9.5%--expectations were for a rise to 9.7% so the shorts instantly ran for cover--again.

Despite the market reaction to the report 247,000 people still lost their jobs. This was the 19th consecutive month of job losses but it was the smallest loss since August 2008--and that gave the markets one more lift over resistance.

The surprising drop in the unemployment rate and the better than expected job losses helped to fuel hopes that the recession is over--or at least the bottom is behind us. The administration was quick to take credit for the improvement in the economy but analysts point to the Fed's zero interest policy plus the various financial rescue programs implemented by the Fed and the Treasury.

The big driver over the past month has been earnings. With more than 450 of the S&P-500 stocks already reported there is little left to generate excitement although we do have a few stragglers turning in results this week--including AMAT, Wal-Mart and JC Penny (JCP).
The markets waited last week for Cisco (CSCO) to blow their results out of the water but boy were they disappointed. When the normally enthusiastic John Chambers did not confirm a recovery or even a bottom it really took the wind out of the tech sector. Cisco is now in 40 different product sectors other than just routers and switches--if they are not seeing an improvement in orders then maybe the Q2 bottom was just wishful thinking. In any case the markets were not impressed.

Traders have been listening to economists over the last several weeks thinking it's all up from here---then the earnings cycle showed 54% of companies missed their top line revenue growth and lowered guidance again for Q3. Finally the normally overly bullish Cisco CEO gives no visibility comments and double-talks his way around lower performance. It's those last two that have investors worried--lowered corporate guidance for Q3 and the big tech gorilla not willing to tell everyone the recession is over.

We're now in the second week of August on the eve of a Fed meeting, earnings are over and the Nasdaq can't get over long-term resistance at 2000. If you were advising someone in your family you would probably tell them to take profits right here--and you have to wonder how many traders are thinking that very thought this weekend. The key is to get out before the rush. Everyone figures it's coming--the only question is when will the big downdraft take place.

We're always on the lookout for clues that will telegraph the next market move. For example Friday was a big rally day--but Goldman Sachs lost $3 after being up several dollars in the morning. Same with Bank America, which closed negative after rolling over. Several energy stocks led the sector decline with sharp losses. Crude itself ended the day off -1.37 at $70.57. The Semiconductor Index or $SOX closed negative and dead on its critical support at 298. Tech stocks won't be rallying in August if the chips crumble.

Sam Stovall, chief investment strategist at S&P predicted on Wednesday that the S&P would stall in the 1007-1020 range. He said it was overbought for this cycle and an attempt to reach 1020 would represent a "topping phase."
Then Raymond James chief investment strategist Jeffrey Staut--who called the bottom back on March 2nd--said the correlation of cycles points to a peak in late July or early August. And then Hugh Johnston--CIS for Johnson Illington Advisors--claims the rally is overdone based on what we now know about earnings.

Of course for every strategist calling a top there are just as many laying out the bullish case. The truth is most analysts and fund managers are now convinced we'll close higher by the end of the year--they key is any pullback. Funds are waiting to allocate big dollars on the next dip so any pullback is liable to be shallow and temporary--but it can demolish short term call positions just the same.

At this point the uptrend on the major indices is still intact. The economic calendar next week is crowded with nothing really critical. The big news will be the FOMC meeting on Tue/Wed and their announcement on interest rates. They are not expected to make any changes but there is always the danger that they will modify their statement to include some indication of when they will start raising rates. The bond market is already pricing in higher rates with the 10-year note yield closing on Friday at 3.85% and the highest in nearly two months. The prospect of a rebounding economy is being felt in the bond market.

If the Fed wants to keep rates low to fuel the fledging rebound they will have to take further action. They'll probably come out with another strongly worded post meeting announcement saying again that rates will 'remain low for a considerable period'. On the other hand they may have to actually do something--like purchasing more debt on the open market in order to stop the four-week climb in bond yields.

Another reason to knock rates back down is the constant need for the Treasury to sell more debt to fund the deficit and the various bailout programs. Over $75 billion in debt will be sold this week and interest rates are rising. The Fed could help the Treasury by applying downward pressure to rates in order to make the auctions go more smoothly. Over the past few weeks the number of bidders has dwindled and the indirect bidders (foreign banks) have dropped sharply. Remember, if an auction fails the market will immediately go into free-fall.

The only thing that seems capable of ruining current market enthusiasm is the specter of sharply higher interest rates. One strategy to guard against a sudden downturn would be to have contingent orders already in place on the indices to buy puts if a critical support level is breached--it's free insurance because you don't have to spend a penny to place a contingent order--it only gets triggered if it's needed--and it all happens instantly whether you are watching the markets or not.

So--we've got a market struggling to maintain its gains but still pointing higher, an unemployment report that was better than expected, a Fed meeting coming up mid-week and more debt coming to auction--the question is...

HOW DO WE MAKE MONEY ON IT?

We've got two plays lined up this week--and they are both BULLISH.

After reading all those cautious comments above you might be surprised to see two bullish plays--but these stocks both have strong reasons for rising and as we've seen the market has been popping higher regardless of any temporary downturns.

Our first plays is a giant in their industry and they have some big stock moving news coming up this week. The chart shows a bullish flag pattern and it looks like the stock is coiling for a fast move to the upside. Fortunately a great call position on this stock is cheap--right around a dollar--a position we'll be jumping on first thing Monday morning.

Our next play is on a stock with huge name recognition that just announced some very bullish news this past week--and the stock shot straight up--but as is often the case it's been floating back to earth on very low volume--a bullish sign. Now the stock is coming close to its uptrend support line and will likely bounce strongly higher off of it--a move we'll be positioning ourselves for with some well-placed calls this week.

We've got two great plays lined up and a powerful market to play them--so let's get going...
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