OUR BULLISH PICK FROM LAST WEEK--PERRIGO (PRGO) CLIMBED EVERY SINGLE DAY DRIVING THE NOV 35 CALLS TO A FIVE-DAY DOUBLE!

This past week the markets blasted higher taking just about everything along for the ride...

OUR BULLISH PICK FROM LAST WEEK--PERRIGO (PRGO) CLIMBED EVERY SINGLE DAY DRIVING THE NOV 35 CALLS TO A FIVE-DAY DOUBLE!

The stock never hit our 'official' entry price but judging by the emails we've received quite a few folks did EXTREMELY well on this pick. We also had AMZN reverse and head higher stopping us out of our puts.

The markets are on a tear higher and the big question this week is--will it last? To answer that question and find out where the new profits are hiding let's take a good look at...

WHICH WAY IS THIS MARKET IS HEADED

The SP-500 closed the week at 1071.49--just a few cents away from a new high for the year at 1071.66. Despite the chip rebound the Nasdaq is still about 30 points below its 2009 high of 2167.

The major indexes are still 30% off their highs despite a nearly 50% rebound from the March lows which many pundits take encouragement from--in other words there is still more room to run.

The chip stocks benefited from a broad sector upgrade from Deutsche Bank on Friday pushing the SOX to a +3.3% gain for the day and a 6.5% gain for the week. Tokyo Electron reported that semi equipment orders had risen 94% in Q3 from the levels seen in Q2.

Tokyo Electron is the second largest chip equipment maker behind AMAT. From the rebound in the SOX it is hard to believe that last week the index had broken support and was heading for the basement.

Most of this week's economic reports will be upstaged by the arrival of some major earnings events. Intel will be the headliner on Tuesday and everyone expects their earnings to be strong. Most chip companies have guided higher throughout the month and expectations are bullish. Intel is expected to post 27-cents in earnings.

The financials have a huge influence on the rest of the market and JP Morgan is the first of the big banks to report announcing this Wednesday before the bell--and they are expected to post strong earnings as well. The rumor is they are turning in some strong trading profits in this market. Jamie Dimon offered to loan money to the FDIC two weeks ago in an interview where FDIC head Sheila Bair was on the same panel. This should be a great earnings report.

On Thursday there are several important reports. Goldman Sachs (GS) is estimated to turn in $4.24 per share in earnings--an impressive 2.5 times their earnings for Q3-08. The financial sector in general is expected to post strong results with an average of 57% earnings improvement over 2008.

IBM will report on Thursday and investors will be hoping to see if IBM can beat their estimate of $2.38 on the strength of their services division and overseas contracts. IBM hardware revenue fell -39% in Q2 so hopefully services will make up the difference. IBM's $3.64 gain on Friday was responsible for nearly 50% of the Dow's 78-point rise.

Google will report on Thursday and has been garnering upgrades for the last several weeks on expectations for a good report. Credit Suisse upped their price target on Friday to $600 from $475 with a close at $515. Unfortunately Google has a bad habit of taking a cliff dive the day after their earnings report. Google declined for two weeks after their earnings in July.

Positive, early reports from companies such as Alcoa, on top of a generally positive tone from senior executives making the rounds of investor conferences last month helped drive recent stock gains.

Alcoa's return to profit earlier this week after three straight quarters of losses was one factor behind the S&P 500's 4.5% weekly gain - its best since July.

Analysts currently expect a 24% profit drop among S&P 500 companies from the third quarter compared to a year ago, according to FactSet. That's slightly worse than expectations in late June but is better than the 26% drop in the second quarter.

This month, 64% of all revisions for S&P 500 earnings were for better results, with analysts getting particularly optimistic about consumer staples so expectations for earnings are high.
Earnings for Q3 are expected to be strong followed by an even stronger Q4 despite the lackluster rebound in economic activity. If you look under all the hype you will see that Q3 earnings are still expected to be 25% BELOW the same period in 2008 yet investors are ready to buy ANY sign of improvement.

Much of the market is led by the financials and fortunately banks are expected to show improved earnings in spite of continued loan delinquencies. Commercial real estate loans equate to 26% of all outstanding loans at banks. Despite the rising delinquencies the banks keep rolling forward as many loans as possible. The banks are trying to push the date of accountability farther out into the future to avoid having to take the charge off in the current quarter. All the banks reporting earnings this cycle will be heavily scrutinized for increases in loan loss reserves as a leading indicator of future charge offs.

Quite a few analysts continue to warn that any improvement in earnings will come from aggressive cost cutting not increased sales. This may be a good earnings quarter relatively speaking but it is far from a quarter of good earnings. That fact may not keep the markets down though. Combine improving earnings with a Fed committed to keeping rates low and this rally should keep on going--the question is...

HOW DO WE MAKE MONEY ON IT?

We've got two trades lined up this week and they are both bullish. The first is on an index we love to make money on and this time should be no exception.

The second is on one of the financials with the best possibility of a big pop soon--and we've got an innovative way to play it that should both increase your returns AND reduce your risk.
We've got a great week in the markets lined up with plenty of news to keep things jumping--so let's get to it.

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