IN SPITE OF A BULLISH MARKET TOYOTA (TM) DIPPED WEDNESDAY DELIVERING A FOURTEEN PERCENT PROFIT ON OUR PUTS!

We had another good week in the markets with the indices continuing their seemingly never-ending climb higher...

IN SPITE OF A BULLISH MARKET TOYOTA (TM) DIPPED WEDNESDAY DELIVERING A FOURTEEN PERCENT PROFIT ON OUR PUTS!

PLUS CTRP JUMPED HIGHER LAUNCHING OUR NEW CALLS TO A QUICK TWO-DAY FORTY-TWO PERCENT PROFIT!

Those were some nice gains but we also got stopped out of Baxter (BAX) plus LMT and HOG expired on Friday.

The market continued to climb skyward but it's beginning to look ready for a pullback. To find out what we might be in store for and how to make money on it let's take a good look at...

WHICH WAY THIS MARKET IS HEADED

As you can both indices hit their uptrend resistance lines Friday and even though this bull run probably has more fuel over the next few weeks it wouldn't be surprising to see a pullback in the next few days--in fact it would be healthy.

Helped by consumer staples, the S&P finished Friday up 2.81 at 1068.30 tacking on 25.57 for the week.

The Nasdaq Composite gained 6.11 points to close at 2132.86 on Friday up 51.96 for the week.
The Nasdaq has been on a tear jumping higher eight out of the past 10 weeks.

There was some positive news this past week and that helped. Building Permits rose 2.7 percent with a seasonally adjusted 579,000 permits marking the highest number since last November.
But the big news was the Philly Fed Manufacturing report's jump to 14.1 that launched the markets to new relative highs on Thursday morning. The 14.1 increase beat expectations of 8% and produced the first two-month consecutive gains since the end of 2007. Inventories continued slipping, pointing to a need to gear up to replenish inventory.

Also Thursday morning the initial unemployment claims report dropped to 454,000, but the Department of Labor revised the previous week's numbers higher, to 557,000. The insured unemployment rate also inched higher to 4.7 percent from the previous 4.6 percent. Continuing unemployed rose by 129,000.

So even though the employment report was mixed the markets rallied Thursday morning on more 'less bad' news--then they pulled back and then jumped again on Friday.

Unfortunately an awful lot of this rally is on the assumption that the US Treasury will be able to sell its ever-increasing amounts of debt.

Wednesday's TIC Long-Term Purchases for July was a major disappointment, at $15.3 billion versus the expected $65.3 billion. In the past, this was a little-watched indicator but it's becoming increasingly important. This indicator measures the international demand for long-term U.S. financial assets. The net foreign buying of long-term securities for the prior month had been $90.2 billion. The report indicates that foreigners sold a net $97.5 billion of long-term and short-term securities. This is a huge turning point as foreigners have turned from buyers to sellers of US debt.

China and Russia have been threatening a boycott of US debt as the dollar continues to suffer under massive dilution. And now this TIC report indicates they are serious. On Friday, Russia's Prime Minister Vladimir Putin again called for other currencies besides the U.S. dollar to be added as global reserves, concerned about the U.S. "uncontrolled issue of dollars".

Dollar futures broke-down below the 77 level back on September 11, then produced a number of potential reversal signals before slipping lower again earlier in the week. On Thursday afternoon, dollar futures began a climb that approached the 77 level again before pulling back into a consolidation zone just below that level.

If the US can't sell its debt interest rates will have to rise and when they do it will be time to get short in a big way. The problem of course is debt--and the government has determined that the solution to too much debt is more debt--but it's piling it on top of a system already collapsing.

FDIC Chairman Sheila Bair admitted Friday that the increase in bank failures had significantly drained the agency's funds. Although in the past Bair had thought it unlikely that the agency would ever have to tap into its line of credit with the Treasury Department, she said when the agency met at the end of the month, that option would be explored as a means to rebuild the depleted funds.

Chairman Bair went beyond replenishing FDIC funds--she also said that she didn't believe that mark-to-market accounting for bank loans should be further extended or that large financial entities should be led to expect further government assistance if they experience problems.

Friday evening's closure of Irwin Union Bank, F.S.B., Louisville, KY and Irwin Union Bank and Trust Company, Columbus, IN added two more financial institutions to the previous 92 banks closed so far in 2009 bringing the total this year to 94--compared to 25 in all of 2008.

A year ago, the FDIC's insurance fund had $45 billion available, but that's now been diminished to $10.4 billion minus the $850 million blow the FDIC estimates that Friday's closures will cost the Deposit Insurance Fund. That fund can't stand too many more Fridays at this rate.

The point of all this is even though the markets continue to rally--and we should bet that trend--there are serious underlying problems that haven't gone away. If the Fed can't keep interest rates low traders will have to kiss the rally--and any economic recovery-- goodbye. But for right now the markets looks strong although bumping up against resistance--the question is...

HOW DO WE MAKE MONEY ON IT?

We've got two stocks lined up this week--one bullish and the other bearish.

Our bullish pick is on a stock whose earnings and chart are both rising in tandem as traders flock to the few winners in an otherwise hard-hit economy. We'll use any dip on Monday to jump aboard this climber for what looks to be some very nice upside profits.

Our next play is on a financial stock that has really taken a beating lately. In spite of a rising market this stock just keeps tracing lower highs and lower lows--the classic definition of a downtrend. Now the stock looks ready for another spike lower and we'll be there to catch it with some well-placed puts.

We've got two great set-ups this week so let's get going...

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