OUR NEW RAYTHEON (RTN) CALLS ARE UP A GENEROUS TWENTY-FOUR PERCENT!

This past week the markets turned radically south in the final two days before options expiration...

DRIVING OUR NEW VOLATILITY INDEX (VXX) CALLS UP A SWEET FIFTEEN PERCENT!

OUR TWO TIMES SHORT SP-500 (SDS) CALLS UP A MUCH APPRECIATED SEVENTEEN PERCENT!

AND OUR NEW RAYTHEON (RTN) CALLS UP A GENEROUS TWENTY-FOUR PERCENT!

In fact since our portfolio is currently so bearish every one of our positions benefited in one way or another--and by the looks of things this avalanche of profits is just getting started as the markets teeter on the brink.

But to be fair we were a little early to the bear-party--and some of our positions suffered for it. Our PAYX puts expired worthless Friday which is the first time that has happened in a VERY long time--not fun. We also lost money on our FAZ calls but the play actually turned out better than we thought--the FAZ jumped mightily on Friday and our position really benefited.

Now the deadwood has been cleaned out and the way looks clear for some outstanding gains--but where are the new profits to be found and how should we approach this market? To help find out let's take a good look at...

WHICH WAY THIS MARKET IS HEADED

Over the last week the SP-500 rallied to resistance at 1100 twice and then closed at a new four week low tracing a textbook failure at clearly defined resistance. The only surprise was the strength of the short covering in the afternoon as traders rushed to lock in profits before the weekend.

With all the economics pointing toward future devastation you would have thought the close would have been more negative. Of course it was expiration Friday so some end of day short covering was a given as traders closed positions rather than face an exercise on Monday. There was also a rumor that the Fed was readying a new stimulus announcement--but it's hard to imagine how traders could swallow that old saw for any kind of stock recovery--the Fed has done about as much as they can.

Any Nasdaq strength Friday was due to a few small caps like CRM, INTU, PCLN, AKAM and FFIV. All the big guns like GOOG, AAPL, MSFT, INTC and RIMM were negative--not a good sign. In spite of stronger relative performance than the SPX the Nasdaq is still looking pretty bearish---chips are teetering on their 6-months lows and the PC sector has shorted out completely. Hewlett's less than exciting earnings report last week was the final straw---expect further weakness.

Friday's volume was only 6.8 billion shares--weak for an expiration Friday but one statistic was pretty telling---the new 52-week lows spiked to levels not seen since the crash at the end of June. When large numbers of stocks are not just declining but making new 52-week lows it confirms the downtrend is real and probably lasting--and there are some good reasons for that.

New Jobless Claims at 500,000 were the highest since November and the third consecutive weekly gain. The rise in new claims during the survey period for the August non-farm payrolls suggests we are going to see even more job losses on the payroll report due out on September 3rd. There are no reliable estimates because of the unknowns about the lingering census worker terminations--about the only guarantee is there will be more job losses.

The biggest hit to market sentiment came from the Philly Fed survey on Thursday. The index dropped -12.8 points to a -7.7 from a positive 5.1 in July. The experts were completely blind-sided as 58 out of 58 economists surveyed by Bloomberg were expecting a positive number on the Philly Fed. This decline back into contraction territory put the index at a level not seen since July 2009 and was one more confirmation we are already in recession.

This big of a drop in the Philly Fed is a serious problem because the manufacturing sector had been leading the rebound--and now it isn't. Plus the Philly Fed Survey is the most followed of the manufacturing surveys. The dramatic decline in the headline number and in the individual components is indicating a contraction back to levels that will trigger more layoffs and put businesses and consumers back to where they were when this panic began. This was a serious hit to market sentiment that will have a longer-term market impact.

Meanwhile the financial sector is continuing to crumble as we saw in our FAZ rally. The system lost another eight banks on Friday bringing the total casualties for the year to 118. The Chicago based ShoreBank with $2.16 billion in assets was closed at a cost of $367 million to the FDIC. That was the largest of the banks closed.

Banks are still suffering from the crash in their prime collateral--the real estate sector and a still rocketing number of loan delinquencies. Over 12 million homeowners are behind in their house payments as the various bailout or modification programs are not working. In July the Treasury Dept reported 630,000 applicants for loan modifications were disqualified for not fitting the required criteria. Only 24,577 who successfully made it into a trial modification program were approved for a permanent loan--down from 51,205 in the prior month. Meanwhile unemployment is rising bumping up the number of people in trouble on their house payments.

According to RealtyTrac we are likely to see slightly more than one million more home foreclosures this year up from 900,000 in 2009. Moody's Mark Zandi said the projection for next year in 2011 is 1.5 million foreclosures. As of June 30th only $490 million has been spent of the $75 billion set aside to help homeowners avoid foreclosure by lowering payments.

This past week the economic reports have been pretty tough--but this coming week we're likely to see more of the same as the news will be dominated by housing and the GDP revision.

The housing reports are not expected to be good--this is the first month that has no overhanging benefit from the tax credit and some analysts are expecting sales declines of 5% to 7% for the July period--or more. Sales of existing homes are expected to fall for the third straight month in July after the government ended the tax credit for homebuyers. Some economists expect existing home sales to fall 11% to about 4.78 million annualized units in July from 5.37 million in June. The figures will be released Tuesday.

These are lagging reports so any negative number will be extrapolated forward to cover August and the rest of the year. Every month for the rest of the year sales are expected to decline so the July numbers this week will be a jumping off point for future estimate revisions.

The GDP estimates are also worrisome---they have taken a shocking drop with some analysts now talking about numbers under 1.0% for Q2 growth. This is down from some estimates of more than 3.0% just a month ago. Like the Philly Fed this is a dramatic decline and does not bode well for the equity markets.

The talking heads on TV have been asking the question for weeks, "are we going to have a double dip recession?" If you look at the parts of the economy are already in recession like retail, housing and manufacturing it is not much of a jump to conclude we are already in one.

That possibility was further confirmed by the Weekly Leading Index taking a dive to 120.8 from 122.4 posting the first decline in three weeks. It is now only .4 points from a new 52-week low at 120.4 and indications are the decline to continue.

We've got a rapidly weakening economy and a market that is finally figuring that out--the question is...

HOW CAN WE MAKE MONEY ON IT?

We've waited quite a while for the markets to really break down and now it's looks like it's happening--and we've got two extremely high potential plays lined up to take advantage of it--and neither one is a stock.

They are both leveraged ETFs on sectors set to completely implode. When you combine the current market action, the leverage of the ETFs themselves AND the leverage of the options we'll be buying we've got these vehicles packed with rocket fuel---and this week we're lighting the match!

The profit potential is HUGE on these two plays and we'll be climbing on board with some brand new positions first thing this week--so let's get started...

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