THIS CLASSIC WHIPSAW ACTION SAW OUR PLAYLIST GO FROM UNPROFITABLE TO PROFITABLE AND BACK AGAIN AS THE BULLS AND BEARS BATTLED IT OUT!

This past week the market dipped at the beginning but bounced big toward the end...

THIS CLASSIC WHIPSAW ACTION SAW OUR PLAYLIST GO FROM UNPROFITABLE TO PROFITABLE AND BACK AGAIN AS THE BULLS AND BEARS BATTLED IT OUT!

Among our current open plays some are in the profit zone and some are not--but they are all so close as to be bouncing back and forth almost on a daily basis. We are extremely well-positioned for any decline in the market and that is the prevailing trend but right now the market is holding up---for that reason it is more important than ever to take a good look at...

WHICH WAY THIS MARKET IS HEADED

The markets rallied impressively Friday but their overall trends are still to the downside. At this point it's important to ask what caused the rally, has there been a fundamental shift in sentiment or fundamentals--and most importantly is the rally liable to continue?

The cause of the rally Friday was Fed Chairman Ben Bernanke's 17 page speech at Jackson Hole and some good old fashioned short-covering before the weekend. Bernanke was obviously there to please the markets and sooth the public--and it worked. Even though there isn't much economic news to cheer about right now, the Fed Chairman attempted to boost public confidence that the recovery still has enough staying power to survive until hiring and spending pick up at some undefined point in the future.

He avoided any clear commitments for more stimulus holding back fears that the recovery is more fragile than it is. Bernanke noted the recovery had 'lost some momentum' but echoed the new Fed posture that growth is on track for a 2011 recovery. Until a few months ago it was late 2010 but now the Fed's projected recovery has moved into 2011.

Bernanke continuously emphasized that the Fed was ready, willing and able to provide additional stimulus if necessary--which was a real market pleaser. He said the Fed would continue to evaluate additional monetary easing and reminded listeners the FOMC will strongly resist deflation--a safe tack because inflation is virtually non-existent.

Overall the Bernanke speech offered lots of optimism without offering any hard specifics that would scare any particular segment of the market. The stock market dropped sharply when the text was released but the dip was immediately bought. After the speech concluded and the broadcasters had time to release the text a buy program hit that powered the Dow to 10,100 and set the stage for the end of day short covering.

The market rebound was even more surprising because tech giant Intel warned that revenue would be less than previously expected which should have cast a pall over the entire tech sector. It was interesting that Intel chose to release their warning at exactly the same time Bernanke's speech began and the text released. Apparently they were hoping prevent a sharp decline in their stock price if the news could be overshadowed by Bernanke's speech. Evidently it worked because Intel dipped to $17.81 when they released the warning then rallied to close positive at $18.38. If that news would have been released just a couple days earlier the stock would have likely gone through the floor.

Intel warned that revenue could come in as much as $1 billion below its prior guidance because of weaker than expected demand for personal computers. Their new guidance calls for revenue between $10.8B to $11.2B compared to its prior high range of up to $12B. Analysts were expecting $11.5 billion. Intel also said gross margins were going to be as much as 2% below prior estimates. With its downward guidance Intel joined a long list of companies that have already warned about declining business conditions.

Dell and Hewlett Packard warned last week that the back to school shopping season had been weaker than expected. HPQ said there was weakness in the laptop market and that back to school shopping started later than normal. Several chip companies have reported that manufacturers have been canceling or delaying orders because of weak demand.

Long time chip/tech sector analyst Dan Niles said he was shorting anything with chips and he expected a continued slowdown in the economy and the tech sector. He said you could buy Apple and HPQ but only if you have enough sector short positions to offset fluctuations in those longs. Dan said he expected a double-dip over the next two quarters but he defined a double dip as a GDP of less than 1% growth. Declining demand in the chip sector does not bode well for the Nasdaq.

As far as Dan Niles recession prediction goes he may be right in light of the latest GDP revision for Q2. Expectations had been for a revision down to 1.2% growth from the last update at 2.4% growth. GDP didn't come in quite that bad but it was revised lower as the headline number dropped to +1.6% with the majority of the decline attributed to an upward revision to imports.

According to this latest report U.S. economic growth barely discernable. The GDP is also a seriously lagging indicator with the period covered ending two months ago. Weak growth in Europe is weighing on the U.S. in the form of lower exports so GDP growth is probably still slowing. Job growth remains a serious problem according to Bernanke and that will be a drag on GDP the rest of 2010--at this point GDP could easily come in negative for this quarter or just marginally above the zero line.

The Final revision to August Consumer Sentiment also declined slightly to 68.9 from the first August release at 69.6. This downward revision was small but the next release on September 17th is liable to be quite a bit worse. Economic conditions have declined significantly in the last two weeks with the higher jobless claims. Plus this coming Friday we are probably going to see another loss of jobs in the non-farm payroll report.

The factors impacting sentiment the most are jobs, home prices and for those with retirement plans--the stock market. All three of those factors are still heading lower so it's not surprising to see consumer sentiment continue to weaken--which could impact spending especially going into the all-important fourth quarter.

So the answer is that economic conditions didn't change on Friday--they are still declining---but the Bernanke speech pacified investors enough to spark some short-covering. The question is will it continue?

We've got a big test of any further bullishness coming up with some critical economic reports this week starting with the FOMC minutes released on Tuesday which will give us some insight into how bad the Fed Governors really think the economy is. We've also got the national ISM report and the big one--the Non-Farm Payrolls on Friday.

The ISM is expected to decline in line with the regional reports but remain in expansion territory over 50.

The Non-Farm Payroll report are expected to show a loss of -100,000 jobs but it is unknown what impact the lingering census terminations will have. The headline forecast is for permanent job losses and does not include any census workers. Last month the economy lost -131,000 jobs but that included a loss of -202,000 government/census jobs and a gain of 71,000 private sector jobs. It is actually possible that we see a headline job gain if the census exodus is over. However, whisper numbers range from a loss of -50,000 to a loss of -200,000 jobs. A job gain would be a very unexpected and bullish surprise.

Jobless Claims have been a problem over the last four weeks with the prior week's number revised higher to 504,000 and last week's rate at 473,000. For the last four weeks the average has been solidly over 485,000 per week and that suggests the Non-Farm Payrolls are going to be negative.

In addition to the Non-Farm payrolls on Friday China will release its PMI on Tuesday and the report is likely to show economic contraction. The world is counting on China to pull the rest of us out of recession so anything below 50 will be seen as very bearish. Two weeks ago, the market tanked when China reported slower imports.

Another contribution to the current economic slowdown is the drop in stimulus spending. More than 80% of stimulus funds have already been spent, canceled or postponed. In theory the economy was supposed to have rebounded into self-sufficiency by now but that hasn't happened and now state and local governments have no money to keep workers employed on new projects.

The bottom line is nothing has changed fundamentally--the economy is slowing and there is little on the horizon to change that. But the markets may have become oversold and Friday's bounce could continue slightly higher--the question is...

HOW DO WE MAKE MONEY ON IT?

We have two plays lined up this week to take advantage of the current market--one is bullish and the other bearish.

Our bullish play is on a stock that produces a certain commodity that everyone seems to want--especially right now. The company just reported record earnings and investors are taking notice. The stock just broke out to a new all-time high Friday and by the looks of things that uptrend will continue taking our new call play to some very generous profits!

Our next play is bearish and it's on a stock that just hit a six month low Friday with enough momentum to keep punching lower. The company is over-loaded with debt and just reported earnings that were lower even than last year's dismal results--this stock is pointed straight down and should take our new puts with it for some outstanding gains!

We've got two super high-potential plays lined up on a market ready to move--so let's get to it...

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