PF CHANGS (PFCB) PLUNGED LAUNCHING OUR SEPT PUTS TO A SWEET THIRY-SEVEN PERCENT OPEN PROFIT!

This past week the markets finally woke up to the idea that the economy may not be roaring back quite as fast as the bulls thought---and our bearish arsenal of stocks jumped to the upside...

PF CHANGS (PFCB) PLUNGED LAUNCHING OUR SEPT PUTS TO A SWEET THIRY-SEVEN PERCENT OPEN PROFIT!

PLUS LAST WEEK'S FALLING MARKETS CATAPULTED OUR VOLATILITY INDEX CALLS TO A WHOPPING FIVE-DAY SIXTY-ONE PERCENT OPEN PROFIT!

Heck even our Electronic Arts (ERTS) puts that were so upside-down after earnings are now in profit territory. In fact all of our open positions benefited from last week's market action and as good as that was it's likely to get a whole lot better because all of our current positions are bearish and the markets look poised to keep on crashing.

But will stocks keep going down in a straight line or is there a big bounce in our future? To help find out and home-in on this week's profits let's take a good look at...

WHICH WAY THIS MARKET IS HEADED

The SP-500 broke down out of its rising bearish wedge indicating much lower prices from here. First support is not until the 1050 level but we'll likely see that broken--possibly before September's expiration.

The Nasdaq plunged below its old downtrend line so it is now officially bearish. Big cap techs are breaking down quickly led by the collapse of Cisco and Intel. The chip sector has broken below support to a new six month low following more than a dozen downgrades last week. The Nasdaq lost more than 5% for the week. Initial support is at 2090 but we'll likely see a lower low down around the 2000 level.

It was interesting to see how many market analysts were surprised at last week's drop especially considering the economic weakness we've been seeing. Much of the market was pinning their hopes on the Fed but they are essentially out of bullets as interest rates are about as low as they can go.

And if some Fed members have their way rates may not stay low for long. Kansas Fed President Hoenig blasted "Bernanke and his allies" on Friday for continuing to 'keep rates low for an extended period'. Hoenig joined a growing group of Fed heads including Bullard, Plosser, Fisher and Lacker in speaking out against the current Fed policy.

These are a few of Hoenig's hawkish comments from his speech on Friday, "A zero rate after a year of recovery adds to uncertainty." "Zero rates during a period of modest growth are a dangerous gamble." "Slow growth is not a decline in growth and we should not act hastily." "A continued zero interest rate is as likely to be a negative as a positive." "Bernanke and allies are trying to use monetary policy as a "cure all" for "every problem faced by the U.S. today." "Keeping rates too low for too long will lead to another severe recession in a few years."

Hoenig is apparently tired of just registering dissent at recent FOMC meetings and has decided to take his feelings public. These two sides are building to a major conflict the next time the Fed meets on September 21st, but if the economy keeps slowing and the market dives rates will likely stay low--at least for the time being.

The most important earnings report last week was Cisco as they represent the biggest chunk of the networking sector. Wednesday night CEO John Chambers disappointed investors with a warning about the current business climate, "We are seeing a large number of mixed signals in both the market and from our customers' expectations, and we think the words "unusual uncertainty" are an accurate description of what is occurring." Normally John Chamber is a huge cheerleader for Cisco and the tech sector in general so his cautious guidance really shook the markets.

Several analysts reinforced the idea that corporations are gun shy right now and will only spend money if the economy improves. They are also poised to slash spending quickly if the U.S. falls back into recession. Nobody wants to get caught over-extended like they were in 2008.

Cisco's sales are a leading edge of the IT build out cycle. The networks have to be in place before any servers or PCs will function. If Cisco is seeing a downturn in orders then everyone else is seeing the same thing. We are likely to hear more cautious guidance when Hewlett Packard reports earnings this Thursday.

As confirmation of a slowdown in the tech sector research firm Gartner cut their IT sales projections for the rest of 2010 on Friday. Overall they expect IT spending to hit $2.4 trillion in 2010, up from $2.3T in 2009. However, they cut their estimates from a +4.1% growth rate to a 2.9% growth rate. It was just a few weeks back they were expecting a 6% growth rate.

Gartner said companies were still cautious about committing to new projects and were still worried about the potential for a double dip recession. Decision-making cycles were still long and many companies had contingency plans for the next 12 months, which could see more projects suspended if the economy continues to weaken. This is just another confirmation point that the economy is hitting some resistance.

This week we'll have more evidence of economic strength or weakness in the retail sector. This is key information as personal consumption still makes up 70% of the US economy.

J.C. Penney (JCP) warned on Friday that earnings this quarter would be below street estimates. JCP expects to earn between 16 to 20 cents and the street was expecting 24 cents. Penney also lowered the full year estimates.

Joining JCP in sharing weaker guidance and flat sales was Kohl's (KSS), Nordstrom (JWN) and Dillards (DDS). Penney reported a sharp drop in same store sales in July and was forced to slash prices to generate traffic. Kohl's beat the street estimates on earnings but guided to lower full year profits than analysts were expecting. Kohl's said the biggest problem for their middle class customers was unemployment. Even those who had jobs were spending less because they were afraid they could lose their jobs if the economy slowed again.

This week we will get earnings from several more retailers including HD, LOW, TGT, ANF and others. Last week we saw JCP, KSS, DDS and JWN lower guidance so the results from the other big stores could continue to drag the markets lower.

It is pretty clear by any metric that the U.S. economy is on shaky ground. There are dozens of indicators and plenty of anecdotal evidence that consumers and corporations are worried about the future.

Corporations are sitting on record piles of cash but they refuse to spend it because of the painful lessons from 2008. Banks are also sitting on lots of cash but they are hoarding every penny because the assets they've lended against--real estate--are continuing to fall in value. A large majority of their loans are underwater but regulators are looking the other way to avoid sparking another banking crisis. They know that once the economy starts accelerating the real estate problem will solve itself--but until then the banks have to hoard reserves just in case that recovery takes longer than they thought. Eventually regulators will have to recognize these underwater loans and banks will have to add to reserves.

The point of lowering Fed interest rates is to stimulate bank lending--but it isn't happening. When a bank borrows $1 million from the Fed and then leverages it into $20 million in loans it creates a huge amount of activity. In addition to consumer loans business borrowers buy equipment and supplies, pay salaries, rents, etc and business activity skyrockets. We are not seeing that now because the banks are too scared to lend. They claim they are making loans but the numbers tell another story. You have to have perfect credit and a golden balance sheet to get any kind of bank funding. Few small businesses and startups have either after the last three years.

At the consumer level as real estate prices fall the volume of cash extracted from real estate has declined by nearly $1 trillion since 2008. Times have changed and home owners can no longer finance lifestyle improvements through home equity. This is called deleveraging and it is happening on a nationwide scale. As long as deleveraging is the primary driver of the economy growth will be minimal or negative.

This is the view going forward right now as the markets fall off of a two month peak--the question is...

HOW DO WE MAKE MONEY ON IT?

By the looks of the charts and the economic forecast we've just seen the first small step lower this past week--all indications are we've got much more downside to come. So it shouldn't be surprising that the two trades we have lined up this week are bearish and hold some excellent profit potential.

Our first play is the worst stock in a hated sector--and it's chart shows it. The company just came out with earnings about a week ago and they were down almost 60%! This stock is headed south fast and it's perfectly positioned for a brand new put play!

Our next position is on an inverse leveraged ETF that really holds the power to generate some big profits quickly--especially considering the markets current direction. We'll be buying in on any pullback in the stock for what looks to be some outstanding profits!

We've got two excellent looking plays and a market on the brink--so let's get to it...

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