MOODY'S FELL OFF A CLIFF LAUNCHING OUR NEW PUTS TO A LIGHTNING FAST ONE-DAY THIRTY-ONE PERCENT PROFIT!

Sideways action turned to down action this past week driving some big profits on our latest position...

MOODY'S FELL OFF A CLIFF LAUNCHING OUR NEW PUTS TO A LIGHTNING FAST ONE-DAY THIRTY-ONE PERCENT PROFIT!

Of course our official position had a pretty tight trailing stop getting us out quickly--for those of you who hung on however open profits on those MCO Oct 23 puts are currently hovering around 200%--a strong testament to the momentum on this play.

We also got stopped out of our Caremark (CVS) calls Monday and never did get filled at our target price on BMC Software (BMC) so we are now all back to cash.

To find out where to put that cash for maximum profit let's take a good look at...

WHERE THIS MARKET IS HEADED

The SP-500 peaked at 1080 on Wednesday but the sellers were waiting to take profits immediately driving the index lower. Initial support at 1060 was quickly broken and Friday's intraday low of 1041 came very close to the next support level at 1035. With the index sitting right at support any move lower confirms a new downtrend--a confirmation we are liable to get on Monday.

The Nasdaq slammed into horizontal resistance at 2160 on Wednesday that dates back to March and July of 2008. The Nasdaq spent over a month in a range between 1950-2015 and that range could be where this index is headed. The SOX has declined to support at 320 which doesn't bode well for the Nasdaq. Dragging the SOX down is Intel, which is resting on support at 19.25. If Intel fails the SOX will fail pulling the Nasdaq deeper into the channel you see above.

The market slide extended to three days with a slightly negative close on Friday. Part of the problem was a drop in the sales of existing homes to 5.1 million from 5.24 million. That is an annualized rate and pretty normal as sales always decline as the summer ends. Home prices improved to only a -12.5% year over year decline and inventory fell to 8.5 months--the lowest level since April 2007. The 12-month average of existing inventory is 9.7 months. Sales declined for the month but were actually up +3.4% over the same period in 2008--an encouraging sign but it's all dependent on interest rates.

On Wednesday the Fed was upbeat suggesting the economy was moving out of the recession. They retained the comments about keeping rates under .25% for an extended period and also extended the time period over which they will buy Fannie and Freddie mortgage backed debt--all bullish for the markets.

However on Friday Fed Governor Kevin Warsh warned the Federal Reserve's need to raise interest will come before it becomes obvious and will need to be faster and stronger than "customary". Warsh said the Fed needs to be as aggressive on the way up as they were on the way down. He warned that the risk of a policy mistake remained high.

Warsh is an influential member of the Fed and his hawkish speech on Friday roiled the markets. The problem is the minute the Fed officially hints at raising rates the market trajectory will resemble that of an elevator with a freshly snapped cable.

Greenspan was widely criticized for removing the post 9/11 stimulus too slowly and allowing the economy to overheat producing the housing bubble--and subsequent burst we're all suffering from now. It took Greenspan two years to raise rates +4%. Warsh is suggesting the Fed not repeat that mistake and act aggressively once they start.

How long the Fed will be able to keep rates low though is a question--because the Treasury still apparently needs to sell a lot of debt to keep the Federal Government humming.

The government auctioned $112 billion in notes of various terms last week and half the debt was purchased by foreign central banks. U.S. primary dealers are buying less and less but so far the foreign banks have picked up the slack.

The bottom line is our fate in the hands of overseas debt buyers. If we make them mad with a sudden surge of dangerous moves they can and will stop. Famous money manager Julian Robertson said last week we were facing Armageddon because of our massively growing debt--and it's hard to disagree. There are some that predict interest rates could go back to double digits over the next several years if something is not done promptly. For those of you who remember the early '80s qualifying for a home loan at 14% was a bit of a challenge.

Next week is going to be a major week for economic reports and the markets should see some big movement. On Monday we get the last look at the Q2 GDP and it is expected to decline to -1.1% from the -1.01% in the last revision. This should not be a problem for the markets unless there is a major deviation from expectations.

On Wednesday the Chicago ISM is expected to rise slightly to 51.1 from 50.0 and will be a preview of the national ISM due out on Thursday. The national ISM for September is expected to rise to 54.0 from 52.9 in August. Again, this should not be a significant market event unless the numbers are a big surprise.

The biggest report for the week is the Non-Farm Payrolls on Friday. The consensus is for a loss of -188,000 jobs and less than the -216,000 jobs lost in August. Morgan Stanley believes the losses will be under 150,0000. It looks like most analysts have finally accepted the inevitable that the recovery may be jobless until early 2010.

This jobs report could easily ignite the market one way or the other. The Fed won't likely move off their "extended period" statement until we start adding jobs again. When we get a month of positive job growth the real worry over the Fed rate changes will begin so a lower jobless number won't always be seen as positive for the markets.

Initial Jobless Claims fell by 21,000 to 530,000 last week. That was the third consecutive weekly drop. This compares to a peak of 674,000 in March--so the rate of new job losses is definitely improving.

So we've got a market rolling over, a Fed Governor hawkish on rates, the jobs report coming up on Friday and a sixty percent gain since March that fund manager would really like to lock in before the end of the quarter on Wednesday--the question is...

HOW DO WE MAKE MONEY ON IT?

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

The first is on a company in the housing sector that has been whistling through the graveyard loudly proclaiming 'everything is all right'--up until they had to hold a fire sale this week to try and clear out their inventory. Investors smell a rat and have been dumping the stock but there's still a long way to go--a situation we'll be taking advantage of with the right puts first thing Monday morning.

Our next play is on an index that just rolled over and is now pointing due south. Fortunately this one won't have to move much to rack up some huge gains on the right puts.

We've got a market with a strong inclination toward profit taking and two excellent plays lined up to take advantage of it--so let's get going...

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