THE USO SHOT HIGHER MONDAY THEN REVERSED STOPPING US OUT OF OUR 34 CALLS AT AN EYE-POPPING TWO-HUNDRED-NINETY-SIX PERCENT PROFIT!

After a dip on Monday the markets blasted higher for the rest of the week--taking our USO play with along for the ride...

THE USO SHOT HIGHER MONDAY THEN REVERSED STOPPING US OUT OF OUR 34 CALLS AT AN EYE-POPPING TWO-HUNDRED-NINETY-SIX PERCENT PROFIT!

WE ALSO BAGGED A SMALL GAIN ON OUR YUM! BRANDS (YUM) STRADDLE AS THE STOCK TOOK OFF AFTER EARNINGS!

That was a good week. YUM could have been even better as the stock continued to the upside in the days following earnings--but we followed our discipline and were stopped out early--and fortunately at a profit. We also got out of STEC early at a loss as it wasn't performing---only to see the thing launch through the roof the day after our exit! Now THAT is a great example of why the markets can be frustrating!

The bottom line though is it was a VERY profitable week--and we've got two news trades lined up to continue the momentum--so let's get started by taking a good look at...

WHICH WAY THIS MARKET IS HEADED

The SP-500 closed at 1165 on Friday which are highs not seen since May. No matter what the news is this market just keeps steadily marching higher. There is an impressive 35% of the S&P 500 stocks trading at or near new 52-week highs and there were 41 S&P stocks that made new highs on Friday alone.

And all that bullishness is in spite of the fact that the Non Farm Payrolls report Friday was horrible and this earnings season is not shaping up to be all that great either. S&P earnings are expected to only increase from 8% to 10% while revenues are set to increase by only 2%--not exactly overwhelming numbers.

The Nasdaq closed at 2401 on Friday at highs also not seen since May and very close to the high of the day--another bullish signal. A move higher on Monday will force the shorts to cover continuing this rally. Apple broke its downtrend last week and is now threatening to make a new all-time high--another positive factor influencing the Nasdaq.

The only potential spoiler for the techs is the chip sector where we've seen a slew of chip warnings lately. Another company warned Thursday night and their shares fell -10% in trading on Friday. Kulicke & Soffa (KLIC) warned that revenue for the current quarter would be "significantly below" Q3 due to softening industry conditions. The company designs semiconductor assembly equipment and is sometimes seen as one of the strong bellwethers in the chip sector. A slowdown in KLIC business means a future slowdown in the chip sector in general. This makes Intel's earnings on Tuesday even more critical for the tech sector.

The focus this week will shift to Q3 earnings as Intel, JP Morgan, Google and GE headline the earnings calendar. Intel on Tuesday will be critical since the chip sector has been receiving almost daily downgrades due to lower than projected PC sales. If Intel lowers guidance again on Wednesday it could be a bad day for investor sentiment.

One testament to the bullishness of the markets right now is how bad the Non Farm Payrolls report was on Friday--and yet the indices continued to climb. The Non Farm Payrolls showed a headline loss of -95,000 jobs when almost everyone was expecting a gain. This was the largest loss of jobs in three months and July and August were revised lower by a total of 15,000 jobs. The preliminary benchmark revision for the prior 12-month period was an additional loss of -366,000 jobs!

The government was the biggest drag on employment last month with 159,000 job losses compared with a +64,000 gain in private payrolls. Private job creation declined slightly in Q3 to +274,000 from +353,000 in Q2. That trend is heading in the wrong direction. Federal payrolls declined -76,000 while state and local governments cut 83,000 jobs.

The unemployment rate was unchanged at 9.6% but the U6 unemployment rose to 17.1%---the highest since last December. The U6 number includes those without jobs and those who are working part time to pay the bills while searching for a job in their field. Instead of employment improving it is still getting worse. Those out of work for more than six months were 41.7% of the total while those out of work for less than a month rose to 19.1%---and again that trend is moving in the wrong direction.

And the thing is--the situation is actually worse that what is shown. What wasn't reported in these employment numbers are the 250,000 workers in 37 states that lost their jobs on October 2nd. Those jobs were part of the $5 billion in stimulus for the Temporary Assistance for Needy Families program. Tens of thousands of these workers lost their jobs when the program ended on October 1st. The exact count is unknown because each of the 37 states configured the programs differently but many states told the workers not to show up for work beginning on October 2nd. These layoffs were not included in the September payroll report because the program conveniently ended a couple days after the survey period for the last jobs report before the elections. The TANF was only one of the stimulus programs ending on October 2nd. Also ending was a $2 billion subsidized childcare program and a $2.1 billion boost for Head Start. Jobs will be lost from both of those programs as well.

So with an employment report that bearish--why did the markets go up on Friday?

Because traders believe the weak jobs report assures the Fed will initiate a new round of quantitative easing. That policy would continue to push the dollar lower and stocks higher. In their best "don't fight the Fed" style traders bought the dip and the market kept on climbing.

The Fed of course is trying to keep a lid on all this enthusiasm. Early Friday morning St Louis Fed President James Bullard tryed to dampen expectations when he said "policymakers could wait until December if they felt the need for greater clarity on the economic outlook." Also, "this upcoming FOMC meeting is going to be a tough call, because the economy has slowed but it hasn't slowed so much that it's an obvious case to do something." However he also said, "It does not seem like inflation is going to hit our target unless we take further action."

Dallas Fed President Richard Fisher cautioned about assuming the Fed would enact QE2. "The markets have drawn too quick a conclusion that this is a likely event. If it is to occur it will only occur after thoughtful discussion." He also warned that it is not clear if the benefits of further quantitative easing outweigh the costs.

But of course traders aren't buying this jaw-boning because they figure the Fed doesn't have a choice. The markets have clearly priced in a move at the November 3rd FOMC meeting but Fed heads are going out of their way to caution against considering it a done deal. This growing wave of caution could weigh on the markets if anyone actually begins to take it seriously.

Economic fundamentals are clearly weak and NOT heading in a positive direction but as we've seen that flat out doesn't matter--as long as the SP-500 stays above horizontal support at 1150 this market is likely moving higher. As long as the dollar is declining we should see stocks rise---assuming traders can get past Intel's report on Tuesday. It's unlikely the Fed will do anything to sabotage the markets before the elections so as long as corporate forward outlooks are reasonable stocks should keep driving higher--the question is...

HOW DO WE MAKE MONEY ON IT?

We've got two plays this week that look so gosh darn bullish it's enough to make me buy their actual stocks for my retirement accounts--but since buying stocks is against our religion here at The Pearly Gates--we're going to get into some high-odds calls instead!

Our first play is on a company that just increased sales to an all time high--right in the middle of the recession! They have a product that folks are jumping on left and right and the stock just jumped off of major support and is now heading decidedly higher--a move we'll be jumping on with some well-placed calls first thing Monday morning!

Our next play is on a company that just catapulted their revenue an astounding 51% equating to a half a billion dollars as money floods into the company from their overseas operations. This company is selling a product in Asia that is going like gang-busters--and their revenue shows it--and so does the trend of this incredible climber. We'll be jumping on board first thing Monday for what looks like another stellar ride to the upside!

We've got two excellent plays lined up on a market that wants to move so let's get to it...

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