DRIVING OUR NEW UPS CALLS TO A FAST FIVE DAY THIRTY-SEVEN PERCENT OPEN PROFIT!

This past week the markets continued their relentless climb higher...


DRIVING OUR NEW UPS CALLS TO A FAST FIVE DAY THIRTY-SEVEN PERCENT OPEN PROFIT!

In addition our Mattel (MAT) calls are trading in profit territory and our CRUS calls are hovering on either side of break-even. This has been a good market for straight calls played to the upside--but will it continue? To help find out let's take a good look at...

WHICH WAY THIS MARKET IS HEADED

This market is on fire---the S&P closed at the high of the week and the high of the past two years.

The Nasdaq finally broke through overhead resistance at 2590 and ran for some nice gains. For four days resistance held but the Nasdaq was still able to stretch its consecutive winning streak gaining 100 points in eight days. Support should now be 2590 but after eight days of gains there will likely be a buying opportunity in our immediate future as some event provides an excuse for profit taking.

This bull run is broad based---Friday was a new two-year high for the Nasdaq, S&P, Russell, Wilshire 5000, NYSE Composite and the Dow Transports.

Along with a flood of new money trying to find a home some economic numbers are fueling the rally as well. The new Jobless Claims reported on Thursday came in at 421,000 bringing the four week moving average down to 427,500---the lowest level since August 2008. The headline number was a drop of -17,000 over the prior week. We could be very close to a headline number under 400,000. The most recent low was 410,000 two weeks ago.

Also helping push the markets higher was a stronger than expected Consumer Sentiment report for December. The headline number jumped to 74.2 from 71.6 in November. This is the highest level we have seen since June's 76.0 reading. The summer decline ahead of the elections appears to have ended and sentiment has surged +6.5 points in just the last two months.

The rebound in December was due to a strong increase in the present conditions component from 82.1 to 85.7. This is the highest level for that component since January 2008. The expectations component rose from 64.8 to 66.8. Consumers appear to be pleased with the outcome of the election and the possibility of tax rates staying relatively low.

Once the tax compromise is passed there could be another large spike. The House Democrats are putting up strong opposition to the President's compromise and have refused to pass it. The House has enough Democratic votes to prevent it from passing if they really want to stand united. We saw a rally as soon as the compromise was reported but then Democrats instantly began vowing to defeat it. The markets want the tax cuts extended and they will probably continue sideways until the fate of the compromise is decided. If the measure fails expect a big decline but if it passes we should see an acceleration of the rally. Consumers and investors are always happy about keeping more of their own money.

On the negative side the budget deficit for November was -$150.4 billion--a 25% increase over November 2009 and the largest November deficit on record. Revenues were up +12% but outlays increased by +18%. The government's fiscal year begins in October and for the first two months the deficit has totaled $290.8 billion. The government is projecting a $1.3 trillion deficit for the entire year or 9% of GDP. Perhaps instead of raising taxes the government might consider cutting spending.

On Thursday the Treasury Dept auctioned off $13 billion in 30-year securities and surprisingly the auction was very strongly bid. Recent long-term auctions have had weak demand. The bid-to-cover ratio at 2.74 was the highest level since August with foreign central banks buying the largest amount--49.5% of the offering. The Fed is buying in the 3-7 year range so it was not a result of the Fed supporting the bidding. After two days of declines this rejuvenated the bond market but Friday the bond market sold off again with yields on the 10-year approaching six-month highs

Pimco, the world's largest bond fund, is raising its forecast for U.S. growth next year as policy makers pump in a "massive amount" of stimulus into the economy, according to CEO Mohamed El-Erian. Pimco raised their estimates for growth to the 3.0-3.5% range from 2.0-2.5%. JP Morgan raised their estimate to 3.5% and Morgan Stanley raised estimates to 4% from 2.9%. This increasing growth rate should continue fueling the markets higher.

Edward Yardeni said in an interview on Friday his 2011 year-end target is between 1400-1500 because of improving global fundamentals and expected earnings on the S&P of $100 in 2011. He also reminded everyone the third year of a presidential election cycle has averaged a 20% gain since 1962. That historical trend along with the post recession rebound could produce a surprising rally in 2011.

China's economy is doing so well right now inflation is becoming a problem. The country's consumer prices rose +5.1% driven by higher costs for food. That was well above the 4.7% consensus by analysts. It was also significantly higher than the 4.4% rate in October. Producer prices rose by 6.1% and a full point over estimates. Industrial output rose +13.3%, also stronger than analyst estimates. Retail sales jumped +18.7% and fixed asset investments rose by 24.9% year to date, also higher than expected. Their trade surplus was $22.9 billion. (That compares to our trade deficit of $38.7 billion) Broad money supply or M2 rose by 19.5% and the fastest gain in six months.

An 18.7% jump in retail sales in November is outrageous--the U.S. by comparison is expecting a +1% increase when sales are reported on Tuesday. The Chinese Government is going to have to apply the brakes or their ballooning economy will inflate to the bursting point. Chinese auto sales spiked +27% in November to 1.7 million vehicles--sales for the year have already reached 16.4 million vehicles with 18 million expected by year-end. Streets are becoming so crowded some cities are rationing license plates. In Shanghai the available plates are sold at auction with prices averaging $6,000 or more. Those numbers are astounding and a graphic illustration of how fast wealth is moving to the far-east.

Even if China raises rates sharply the impact to our markets should be minimal. The expectations from the FOMC meeting on Tuesday are also already priced in after a week of consolidation. In either case it will probably take a highly unexpected action to produce a meaningful dip and any dip is likely to be bought--the question is...

HOW DO WE MAKE MONEY ON IT?

The major indices are moving higher and will likely continue to--but certain stocks will outperform the markets as a whole and we've got two exceptional candidates lined up.

The first is a 'both ways' trade on a mobile device maker that has been trending higher lately but just pulled back to its uptrend line--and with earnings coming out soon this one is likely to explode. Fortunately we've got a unique strategy lined up to profit almost no matter what the stock does!

Our next play is on a commodity investors just can't seem to get enough of--in fact it's so hot it's outperformed gold over the past year and will likely continue to. This one also looks ripe for a new entry point and we'll be climbing on board with some well-placed calls first thing Monday morning!

We got a market climbing higher along with two well-placed trades to ride it--so let's get going...

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