WALMART (WMT) ANNOUNCED EARNINGS THURSDAY DRIVING OUR SEPT 50 CALLS TO AN EYE-POPPING THREE-DAY ONE-HUNDRED-TWENTY-ONE PERCENT PROFIT!

The past week the markets turned down for the first time in five weeks, but one stock shot straight up...

WALMART (WMT) ANNOUNCED EARNINGS THURSDAY DRIVING OUR SEPT 50 CALLS TO AN EYE-POPPING THREE-DAY ONE-HUNDRED-TWENTY-ONE PERCENT PROFIT!

Of course some of you made even more but this 'automatic' profit was still pretty sweet as the stock reversed after its initial jump higher stopping us out of the play. We were also stopped out of AutoNation at a much smaller loss as the stock dipped lower last Monday.

We seem to be at a turning point in the markets as they digest the past several weeks big gains--the question now is...

WHICH WAY IS THIS MARKET HEADED?

We are at a turning point in the markets--after trading sideways for the past two weeks the major indices either HAVE to trade higher or they will break their uptrend lines. Those uptrend lines are a technical indicator every trader can easily identify--so if uptrend support breaks expect some selling that could accelerate quickly.

That said this market has more lives than a basket of cats so don't count out the uptrend yet. Friday was the lightest day of the week for volume and the average for the week was just under 9 billion shares--so the sideways market is undecided both in direction and volume--but that is likely to change this coming week.

This big rebound needs a breather--small caps jumped 67% from the 343 close on the Russell-2000 on March 9th to the 575 close on Thursday. That was a gain of +232 points or 67.6%--all without a 10% correction along the way.

If you go back in history and chart recoveries out of recessions you will NOT find a single 50% rebound off a recession low in only five months except for the bear market rally in 1930, which was eventually erased with an further 82% drop in 1932.

Since 1950 the average length of time to achieve a 50% rebound is 18 months BUT those figures were only produced with real GDP growth of +4.5% from the bottom, an average of 850,000 jobs added to the economy, corporate profits jumping by more than 12% and bank lending increasing by more than 5%.

None of those events has occurred in this rebound.

We're likely to see another big plunge lower for one really big reason--the consumer which makes up between 60% and 70% of GDP--is NOT ABLE to spend enough money to fuel meaningful growth in GDP over the next several quarters.

The reason they are 'not able to' as opposed to 'not willing to' is because they are still in debt up to their eyeballs and pinching every penny.

On Thursday retail sales for July declined by -0.1% when analysts were expecting a gain of +0.7%. Core sales (ex-auto, ex-gas) fell for the fifth straight month and at -0.4% was the biggest decline since March. General merchandise stores fell -0.8% and have been averaging a -0.7% drop for the last five months.

JC Penny reported earnings on Friday that were breakeven and lowered guidance for Q3 saying they could lose up to a nickel a share citing a 'tough' environment.

Kohls also warned that the second half of 2009 would be worse than previously expected. Guidance was below Wall Street estimates and Kohls CEO warned that the coming holiday season could be nasty.

Even though we made a ton of money on Wal-Mart calls the company reported that same store sales fell -1.5% in Q2. They had previously forecast flat to +3%. The quarterly decline was the first ever for Wal-Mart. Wal-Mart said consumers were buying less expensive store brand products and buying smaller sizes. They were also paying cash instead of credit. Neither Wal-Mart or Kohl's sees a consumer rebound in our immediate future.

The consumer is maxed out and has no credit so where is this big economic recovery going to come from?

Eighteen months into a deep recession triggered by a credit bubble and consumers have made little progress shrinking a mountain of debt. Until they do, the economy will struggle to grow - likely for years.

Household debt peaked at $13.9 trillion in 2008, almost double the figure from 2000. Since then consumers have cut up credit cards, refinanced outsized mortgages and slashed spending- but they've barely made a dent with household debt currently at $13.8 trillion, according to the Federal Reserve.

"We really have a long way to go," says economist James Hamilton of the University of California-San Diego.

Until the fourth quarter of last year, American consumers had never reduced their total debt in the post-World War II era. Yet the payback or "deleveraging" since then represents a very small step along a very long road.

Household debt peaked at 133% of disposable income in 2007 vs. 65% in the mid-1980s. To pare it back to a sustainable level, consumers will have to pay off - or walk away from - roughly $5 trillion of the total debt outstanding, says David Rosenberg, chief economist of the investment firm Gluskin Sheff. That's more than China's total economic output.

Some debt will be erased through home foreclosures and credit card defaults. But the remainder must be painfully repaid, by consumers holding expenditures below earnings for years. Already, the savings rate, which fell into negative territory before the financial crisis, has jumped to 6.9%.
That's a big change from the pre-crisis period when consumers fueled a consumption binge by borrowing against the bubble-inflated value of their homes.

But it's not enough.

The twin collapse of the housing and stock markets has destroyed more than $12 trillion in wealth since 2007. And wages now are flat-lining amid the recession even as interest charges continue adding to the debt tab.

So as you can see excessive debt will hold back the economy over the months and years ahead. And the recent government efforts are not helping the problem they are making it worse. The 'Cash for Clunkers' program is taking thousands of Americans from driving paid-for cars they can afford into new cars with auto loans creating even more potential bad debt in an unsustainable attempt to revive the auto industry.

The run-up in the stock market has been great for the bulls and a lot of money has been made over the past few month but to borrow an over-used term--is it sustainable?
Based on the facts--no it isn't--not anywhere close.

That being the case what we're mostly concerned about is what is going to happen this week--and funds continue to buy the dips--but at a slower pace.

Equity funds are still receiving money with $5.2 billion in inflows over the last week. However, bond funds saw $12.3 billion in new deposits according to TrimTabs.com. Vanguard confirmed the pattern for July saying $3.9 billion came into stock funds and $7.6 billion into their bond funds. Fund flows into stock funds are still way below the ten-year average of $7.8 billion a month so even though fund flows are below normal the market has continued to rise--and may breakout to the upside once again this week.

However, insider trading is not telling us it is time to buy. Last week there was 29 times more insider sales by dollar volume than buys by insiders. These are the people who should know when a company is doing good and when there is trouble ahead. Until that sales trend reverses it may be wise to hold off on those long term bullish bets.

This is the week we'll likely find out if this market still has the gas to go or will it fall from the sky--the question is...

HOW DO WE MAKE MONEY ON IT?

As we've seen so clearly over the past several weeks stocks with horrible earnings can really climb if the market is bullish--which tells us market sentiment is key. If the markets break down even the best stocks will fall and if they break higher the duds will likely go along for the ride--so what is a trader to do?

We've got two trades lined up this week set up to make us money no matter which way the market goes. They are on stocks with very narrow bid/ask spreads and penny priced options--so they are super efficient--and we're going to set our money traps to get in on the upside if they break higher--and get in on the downside if they break lower. Instead of anticipating market direction we're going to let it go the way it will--and profit handsomely when it does--automatically.

Once you see these two you are going to get as excited as I am so let's get started...
For more information on everything you receive with your Pearly Gates subscription click on www.cashflowheaven.com/pg