STOPPED OUT OF ONE PLAY--OUR FEB 44 PUTS ON CLF

This past week the markets crept higher as our bearish plays drifted lower...

WE WERE EVEN STOPPED OUT OF ONE PLAY--OUR FEB 44 PUTS ON CLF

Every major index ended up higher for the week and that trend may continue this week confirming that the 'Santa Claus Rally' really does exist. The question is--will it continue after the markets reopen on January 4th?

To help answer that question let's take a good look at where stocks have been and...

WHICH WAY IS THIS MARKET HEADING

In looking at the charts two things become obvious--the first is that the overall trend of the markets is up. And the second is that even though rising wedges are bearish patterns they can fail like anything else as the Nasdaq broke to the upside this past week.

So the market is celebrating for now but how long that lasts is in question. Fund managers could very well be waiting for the new tax year to lock in profits and even if the overall trend remains higher upside breakouts like on the Nasdaq above almost always sell-off before heading higher.

The SPX will likely have trouble getting above the 1133-1138 resistance zone. The most likely scenario is a small consolidation this coming week and then a final push to a minor new high, possibly into the first day or so of January.

This is another holiday-shortened week and will be a quiet one from a volume standpoint. As for economic reports it's also going to be a quiet week. There are no significant reports on Monday and then Tuesday we'll get updates on housing prices and consumer confidence. The numbers might not be as good as expected which could cause that consolidation starting Tuesday morning.

One of the biggest challenges going into 2010 will be employment and the consumer consumption that goes with it. The adult U.S. population grows by about 2 million a year, which means the economy needs to create about 1.3 million jobs every year to satisfy all those who want to work. The economy needs to grow at a pretty fast clip to create those jobs, because productivity improvements mean that we can produce about 2% more each year with the same level of employment.

It could take years to bring the unemployment rate down to 5% or 6%--where it was in 2007.

Recession battered workers--the credit squeeze--the implosion of the housing bubble--weak demand at home and abroad---and the relentless drive to cut costs and preserve margins have put more than 15 million people on the unemployment lines. The official jobless rate has jumped from 4.4% to over 10%, while millions of Americans have been limited to part-time work even though they want to work full time bringing total unemployment rate closer to 17%.

Economists at Goldman Sachs figure the unemployment rate won't peak until the middle of 2011 and will drop back to 10.5% by the end of 2011. That's at least two more years of remarkably high unemployment--and remarkably reduced consumption.

In the decade that's just ending, the private sector has actually lost about 2.3 million jobs, the first decade with negative employment growth since the 1930s. Output has risen 15% over that period, but pay has been stagnant.

Unfortunately the jobs created earlier in the decade were fueled by the twin housing and credit bubbles so much of those gains were unsustainable. Most of the rally of the past nine months has been based on government liquidity infusions designed to inflate the economy out of its problems with no focus on real or sustainable growth. Essentially the government is lending the banking sector capital in an effort to get them to lend to individuals and corporations already drowning in bad debt.

And some of these efforts are working--at least in the short term. "Rising incomes, diminishing job losses, a continuing stock market rally, and widespread price discounting are bringing some holiday cheer to consumers," wrote Nigel Gault and Brian Bethune, U.S. economists for IHS Global Insight.

Economists are forecasting an increase in the Consumer Confidence index to 54 in December from 49.5 in November--a significant improvement. The index bottomed at 25.3 in February, far below the average level of 100 recorded during the last expansion. The Consumer Confidence index is due to be released on Tuesday and should give traders a little bit of an idea of how the holiday shopping season faired.

In the meantime artificially low Government subsidized interest rates and easy year over year earnings comparisons are keeping the stock market heading higher for now--the question is...

HOW DO WE MAKE MONEY ON IT?

We've got one play lined up for this holiday shortened low-volume week with two positions--it's a 'both ways' strangle. The beauty of this play is that the options are on a highly volatile asset--yet the options are cheap!

We're able to buy all the way out to February on this one with a combined price of less than 1.30--and we can make money in BOTH directions!

This is one of those rare opportunities where most of the risk is out of the play but the potential for big profits is extremely good--so let's get to it...

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