Monday, February 1, 2010

Four Eye-Popping Winners...

As the markets gyrate south our options plays have been racking up some serious gains...

IN JUST TWO WEEKS OUR ULTRA-SHORT FINANCIALS (SKF) CALLS HAVE JUMPED AN IMPRESSIVE SIXTY-NINE PERCENT!

PLUS OUR PRO-SHARES ULTRA-SHORT QQQ (QID) CALLS ARE UP AN OUTSTANDING ONE-HUNDRED-SIXTY-EIGHT PERCENT!

AND IN JUST TWO WEEKS OUR CENTURY ALUMINUM (CENX) PUTS HAVE JUMPED A WHOPPING THREE-HUNDRED-TWENTY-FOUR PERCENT!

MEANWHILE LINEAR TECHNOLOGY (LLTC) HAS DRIVEN OFF A CLIFF CATAPULTING OUR FEB 30 PUTS TO AN EYE-POPPING FOUR-HUNDRED-THIRTEEN PERCENT OPEN PROFIT!

And that's just our biggest gains--we also have double digit open profits on our two brand news plays on the EUO and TZA and currently we have no losses of any kind and haven't for weeks!

Bear markets have been VERY good to us in the past and this one is no different except now we've got these wonderful inverse ETFs to buy calls on--and it's working beautifully--so far.

Some subscribers have been moving in and out of our plays as they bounce back and forth-- which is a great strategy for the nimble--but since the overall pattern on all the indices is lower it's been great to just hang in there and watch the open profits get bigger and bigger.

It's been a profitable few weeks--but will it continue? To find out let's take a good look at...

WHICH WAY THIS MARKET IS HEADED

Four levels of converging support have all collapsed on the SP-500 so it looks like the big caps are heading lower. Financials, techs, chips, materials and energy have all led to the downside. It is not one sector but a broad market decline--there is no support of any significance until the 1034 level.

The Nasdaq is only 59 points away from a 10% correction to 2088. At the speed the big cap techs are dropping the index will likely continue substantially lower.

Given the lowered guidance from several chip companies it is not surprising that the Semiconductor Index is down 13% for the month of January. Compared to the other major indexes with losses in the -4% range the chips have been beaten senseless by disappointed investors. The chip sector is supposed to lead tech stocks higher whenever the economy is recovering from a recession, so a sell-off in this sector is a very bearish sign.

Qualcomm (QCOM) implied everything was great at the January CES expo in Vegas and then gave wary guidance when they released earnings last week. Qualcomm said they were seeing only a "subdued economic recovery" and that is not what investors wanted to hear--the stock lost -$8 since reporting on Wednesday night.

SanDisk (SNDK) was knocked for a 12% loss on Friday after reporting better than expected earnings of $1.18 compared to analyst estimates of 69-cents. Even though earnings were good guidance was less than the street expected and the stock got pummeled.

Steve Jobs took to the stage to announce the rumored and much anticipated tablet PC and the audience cheered at every point. That was until he told them it still ran on the AT&T network. AT&T has some serious problems and just getting a voice call through their network challenging. They claim it is the massive bandwidth consumption by iPhone users that has clogged the system but regardless of the reason service is horrible.

Their new tablet did little to impress investors and AAPL dropped over twenty dollars since Wednesday.

Then Microsoft 'blew out earnings' but on closer examination the company included deferred revenue from pre-sales of Windows 7 to PC makers and its free upgrade program. Excluding that to get the regular operating income number and the bottom line drops to 60-cents while analysts were expecting 59-cents. They beat by a penny--and the stock dropped almost four dollars from Friday's high.

You should be getting the picture--investors are disappointed and are hitting the sell button. Although earnings have been good quarter over quarter guidance is down--and the markets are always looking forward.

After five months of flat trading the financial sector finally rolled over as well--and this is a biggie because the financials underpin the entire market and certainly the SP-500. Credit problems are growing again and although the banks are fully capitalized thanks to endless debt and stock offerings the guidance from them is also questionable. The commercial real estate loan problem continues deteriorate behind the scenes as banks extend and ignore those problem loans in hopes they will go away when the recovery finally kicks in. As long as the banks keep extending their commercial loans they don't have to recognize them as in default--but they're not going away.

Goldman and JP Morgan are in full decline below recent support and are dragging the rest of the financial sector down with them.

The markets started off with a bang Friday morning after the Q4 of +5.73% growth in GDP was released. This was the largest headline gain since 2003-Q3 and much stronger than the expectations for a +4.5% increase. However the adjustment to inventories accounted for 3.4 points of the 5.73 reading. Real final sales of domestic product, which is the real GDP minus the change in inventories and a true measure of demand for U.S. goods and services, grew +2.9% in Q4 compared to +2.0% in Q3--not quite so dramatic.

The +3.4% GDP gain from the increase in inventories was the largest contribution to growth in over 25 years. Inventories had been forced to dwindle to very low levels due to the credit crisis and the inability by many companies to finance new inventory. When business conditions began to improve the additions to inventories were large on a percentage basis because the starting levels were so low.

As good as it was there were some negatives in the GDP report. Personal consumption expenditures, how much consumers actually spent, rose +2% but that was down from the +2.8% increase in Q3. Spending in the holiday quarter was actually lower than Q3. Auto and auto parts sales subtracted -0.6% from GDP because of the hangover from the end of cash for clunkers.

This will be the largest GDP reading for a long time. Overall GDP is expected to be positive but significantly weaker for this year. It's estimated that growth in the first half of 2010 will be below that needed to keep pace with an expanding labor force, and the unemployment rate will move higher, peaking at close to 11% in the fall.

According to the average estimates of fifty-nine economists surveyed by Bloomberg, unemployment will average 10% or higher for all of 2010. That is the highest rate since 1948. The average for 2009 was 9.3%, the highest level in 26 years.

However growth should pick up toward end of this year because of a stabilizing labor market, an expanding global economy, additional federal stimulus, improved credit flows, and stronger homebuilding. Growth could then be very strong in 2011 and 2012 as pent-up consumer demand kicks in, finally bringing down the unemployment rate.

Another problem that is going to push sentiment lower before we see a major recovery is the flood of foreclosures expected in 2010. Some analysts believe there are as many as 4.5 million homes facing foreclosure in 2010 and believe that while many will escape through a sale or modification there will still be more than three million that actually get foreclosed. This compares to the 2.8 million foreclosed in 2009.

The National Association of Realtors and the Mortgage Bankers Association believe home sales will rise by 448,000 in 2010 from the 5.45 million pace in 2009. An additional three million foreclosures will continue to push home prices down because most potential buyers have already taken advantage of the low prices, decades low interest rates and homebuyer tax credits in 2009. Existing home sales dropped -17% in December---the largest drop on record--not a good sign.

When the markets are declining it's smart to look at the internals to see if we are falling on lower volume--which could signal an end to the selling. That is not currently the case--Monday was the lowest volume day for the week at 8.2 billion shares and each day thereafter rose steadily to 11 billion on Friday. The selling pressure is escalating every day and four of the top six volume days of the year have been Thursday--Friday of the last two weeks.

The bottom line is the path of least resistance is still down. The highlights for the week are the Cisco earnings on Wednesday and the non-farm payrolls on Friday.

The question now is...

HOW DO WE MAKE MONEY ON IT?

We've got two positions lined up this week and they are both bearish. The first is a retail chain that is dropping from very high levels and the selling is accelerating. Puts on this diver should yield some very generous results very quickly.

Our second play is also bearish and it's on a luxury item manufacturer whose sales have all but dried up--and investors are finally starting to recognize the fact. The stock has broken key support and now looks ready to plunge--a ride we'll be jumping on first thing Monday morning.

The markets are trending south with gusto and we've got two great plays lined up to take advantage of it--so let's get going...

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