KNOCKING THE ABSOLUTE STUFFING OUT OF EVERY BEARISH TRADE WE OWN!

What a week! From the depths of bearishness to the heights of manic glee--in just three days the market shot through the roof--


KNOCKING THE ABSOLUTE STUFFING OUT OF EVERY BEARISH TRADE WE OWN!

Last week's action really would have been a disaster if we had to sell out of all of our positions right now---but we don't! And markets have an eerie way of retracing themselves after extreme (and unwarranted) runs to the upside.

Plus don't forget--everything we own isn't down--our brand new calls on Silver Wheaton (SLW) are already up FIFTY-FOUR PERCENT this week alone and look likely to add even more in the days ahead. Heck we already ran up to within 2 cents of our profit target on Friday so it won't take much to zoom right past it.

That's some consolation--but the 800 pound criminally unstable gorilla in the room is all our other plays. For that reason it's more important than ever to take a good hard look at...

WHICH WAY THIS MARKET IS HEADED

As you can see the markets are in strong moves higher--the question is where will they stop and when will they turn?

The S&P-500 gapped up to 1105 on Friday and then wandered down and sideways all day only to close with another spurt that took it back to 1104--all strong signs of short-covering. If we move over 1106 on Tuesday the SPX could climb all the way to 2225--but after that the odds are for a big downside move.

The Nasdaq rallied +6.3% in three days totally on short covering. As recently as Tuesday the Gartner Group cut their estimates for 2010 PC sale by another 2% and Dan Niles was saying short anything with chips--the scenario that caused those events hasn't changed one bit.

There is little fundamental basis for these gains but should they stick on Tuesday there will be some nervous fund managers not wanting to miss the train--and even more short-covering. It's nice to know the reasons behind a rally but it's a rally no matter what caused it--and we need to adjust our trading accordingly.

However fundamentals do tell us how much of a chance the rally has of extending itself into a new bull market. The truth is the economic news was only slightly better than expected---and the gains were mostly on the opening gap and the closing spike. Shorts cover at the open and before the close. The S&P does not rally +6.5% in three days because investors suddenly want to own stocks. Traders were heavily short on Tuesday after a two-week slide and the change in economic sentiment forced them to cover.

If this market seems challenging to trade it is---we've had nine reversals that averaged 7% this year and each reversal occurred in less than ten days. If you are an average trader how do you deal with a 7% change in direction every two weeks? This radical volatility will probably end at the beginning of November and we'll likely see a sustained move to the upside--but until then expect more wild swings. The good news for us is we could us a 'wild swing' after this big updraft plays out--a wild swing to the downside. And this isn't just wishful thinking--the market action of the last several months--and the fundamentals--say we'll get it.

So what was the 'great news' the sparked this rally? It started with China's PMI on Wednesday. The index rose for the first time in four months. This started the global rally but there was some other news as well. India announced it was upgrading its GDP estimates significantly. Plus Australia reported its economy grew at the fastest pace in three years in the second quarter due mostly to demand from China and Asia. Australia did not decline as much as the rest of the world due in part to Asia's voracious appetite for coal and minerals produced in Australia---exports grew by +5.6% in Q2.

When you add in the current economic boom in South America the global picture is really improving. The U.S. is lagging the globe but the prospects for continued slow growth are increasing. We'll find out more about the US situation when the Fed Beige Book minutes are reported on Wednesday.

The news wasn't all good though---the ISM Non-Manufacturing number came in at 51.5---well below the consensus estimate of 53.5 and the prior level of 54.3. The headline reading was the lowest level since January. Declines in employment and new orders drove the index lower. New orders dropped -4 points to 52.4 and employment turned negative at 48.2. Order backlogs fell -2 points to 50.5 and right on the verge of falling into contraction territory.

Since analysts tell us we are now a service economy rather than a manufacturing economy the drop in the services ISM is a bearish indicator. In August the gap between the Manufacturing ISM at 56.3 and the Services ISM at 51.5 was the largest since November 2008. Since the service sector is commonly believed to be the strongest creator of new jobs this does not bode well for the next few months and another reason we'll likely see another swoon to the downside in the next few weeks.

The real weight slowing down the economy is the 15 million unemployed workers out there with many more fearing for their jobs. There is no real recovery without a recovery in employment. There may be slow growth with minimal increases in employment but no real recovery.

The Non-Farm Payrolls reported Friday was 'less bad' than expected but keep in mind we've added just 650,000 jobs in the first seven months of 2010. We lost 8.4 million jobs in the recession that started in December 2007. It would take YEARS to just get back to even at this pace.

High unemployment means weak sentiment, weak housing, weak consumption, and a weak recovery. It does not mean the stock market will not go up. Companies have cut their expenses to the bone in anticipation of a double dip. They are highly profitable even though much of their profits are still derived from cost cutting. For Q3 earnings are now expected to be over 25% and that is an improvement from just a couple weeks ago.

So is this the start of the new bull market? Not likely--remember the volume was very low on this breakout. On both Thursday and Friday volume was only 6.5 billion shares versus the over 8 billion we normally see. It was a holiday week and this week will be light as well.

The biggest report of this week is the Fed's Beige Book on Wednesday. Last month the Fed did not see a lot of light at the end of the tunnel. The labor market was "mixed" and they felt manufacturing "continued to slowly move up." All of those comments showed a Fed that was struggling for a positive way to describe a stagnant economy that is hopefully improving.

In the absence of other economic report this week's FOMC comments released on Wednesday could be a market mover--the question is...

HOW DO WE MAKE MONEY ON IT?

We've got a lot of open plays right now and we don't need to baby-sit two more that may work out--which is why this week we've got two plays that we should be out of VERY quickly for some nice gains.

The first is bullish and it's on a stock that blasted higher Friday on big volume. This stock really tends to take off when it goes as you'll see from its chart--and we only need it to move a paltry 2% to make some really good money. Once you see the stock and the chart you'll realize we could get the move we need in a couple of days--or maybe even just one!

Our next play is a 'both ways' position on a stock hovering right between two strike prices and since it has dollar strikes we don't need it to move much either way to get out at a nice profit, The real beauty of this play is it's not directional--we're buying both puts AND calls for a cumulative cost of only .80 cents--AND we're buying out to October! That means this play is about as close to a 'lock' as you can get!

We've got two very safe plays lined up on a very volatile market--so let's get to it...

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