AT MONDAY'S CLOSE SILVER (SLV) BEGAN TO FALL STOPPING US OUT OF OUR JANUARY 28 CALLS AT AN EIGHTEEN PERCENT PROFIT

After Monday's pop higher the markets bounced all week searching for a sustained direction--and that movement bumped us out of several plays...

EXPEDIA (EXPE) PLUNGED MONDAY HITTING THE TRIGGER ON OUR FEB 24 PUTS WITHIN THE FIRST HOUR AND THEN REVERSED STOPPING US OUT AT A FAST FOURTEEN PERCENT GAIN!

THEN AT MONDAY'S CLOSE SILVER (SLV) BEGAN TO FALL STOPPING US OUT OF OUR JANUARY 28 CALLS AT AN EIGHTEEN PERCENT PROFIT!

Those were two nice plays and the profits are appreciated--but we also got stopped out of our DuPont Fabros puts for a loss as the stock blipped above our stop on Tuesday before rolling over once again to the downside. It is very frustrating to be right on overall direction and still get stopped out because a little volatility triggered a stop/loss. This is one of the reasons 'both ways' trades are so appealing--stop losses and being right on direction become a lot less relevant.

The markets had a good first week and could continue--but we may still see a January sell-off. To get a better idea let's take a good look at...

WHICH WAY THIS MARKET IS HEADED

This past week the SP-500 bounced between 1262 and 1277 as traders wait for earnings season to begin this week. The key here is there was no January sell-off--at least not this past week and that's a good sign because there were factors that could have driven the markets lower--like Friday's Non-Farm Payrolls report.

The Nasdaq also looks bullish as every time its uptrend was tested the index bounced higher. Plenty of new gadgets were introduced at the CES show in Vegas last week--that and earnings should keep interest high in the techs for now.

The big surprise last week was employment. When the ADP report came on Wednesday it showed a gain of 297,000 jobs in December---2.5 times estimates. All of a sudden it seemed probable that the Non Farm Payrolls released on Friday would blow away estimates to the upside as well.

Unfortunately those hopes were dashed when the Non-Farm Payroll report showed a gain of only 103,000 jobs. Private payrolls rose +113,000 jobs but government jobs declined by -10,000. However the job gains from the prior two months were revised higher for a total gain of 70,000--enough to keep the market's bullish by the close.

The big driver this week will be earnings. Alcoa kicks off the Q4 cycle on Monday. Also reporting on Monday will be Apollo Group and homebuilder Lennar. Intel will give us some insight into the techs on on Thursday and JP Morgan is our first look at the financials reporting on Friday. The following week begins the real flood but this week should give us an advance peek with these few majors reporting.

According to S&P earnings for the SP-500 are expected to have grown +27% over the fourth quarter of 2009. Thompson Reuters is a little more optimistic with a 32% growth projection. This will be the fifth consecutive quarter of increased earnings after nine straight quarters of declines.

According to S&P the financials will lead with a mind-boggling +250% increase in profits, followed by energy at +118%, materials +70%, discretionary at +63%, information technology +52% and industrials at +26%. The lower performing sectors are healthcare +11%, telecommunications +7%, utilities +7% and consumer staples +6%.

That 27% earnings growth sounds great until you compare it to the prior three quarters. Coming out of the recession in 2010-Q1 earnings rose +92%, Q2 +51% and Q3 +37%. It's not that earnings are declining--it's that the comparison quarters are becoming harder to beat so the percentage increases are falling.

The fourth quarter's earnings increase is coming from continued cost cutting, a decent increase in revenues in the low double digits and the increase in stock buybacks. When companies buy back shares there are fewer shares outstanding and that increases the earnings per share even without an increase in actual earnings.

As long as earnings show at least a small beat the rally could continue another week or two--but I would not expect any big leg higher given the market's overbought conditions and the rising debt problems in Europe (and eventually here at home) without a decent dip first.

This week Portugal, Italy and Spain will attempt to auction debt and those auctions will be watched very closely. Portugal sold six-month bills on Wednesday at 3.686% and this higher interest rate is causing some serious worries about what those countries will have to pay when they auction their long dated debt this week.

Spreads on some European debt against the German bund were at or near record levels. This came after the EU suggested senior bond holders might have to share in the losses of distressed banks. This would be done by regulators writing down debt and converting it to equity in order to rescue the institution. For instance, if a bank had sold $500 million in debt and could not make the debt payments the regulators would write down that debt to something like $200 million and convert the $300 million loss into equity in the bank. If the bank recovered the bondholders might escape with a breakeven. This proposal did not set well with investors who just want to be secured lenders not unsecured stockholders.

The problems in Europe pushed the dollar to a +3.6% gain against the euro for the week. That was the biggest move for the dollar since August. The rise in the dollar crushed commodities with silver falling -7% for the week along with gold (-$54), copper and crude falling -3.7% each.

Another problem weighing on commodities is the pending rebalance of commodity index funds. The DJ-UBS Commodity Index and the S&P GSCI Index, with about $200 billion in commodity funds tracking those indexes will be rebalanced between Jan-7th and 13th. Basically the indexes try to maintain a specific ratio of commodities in the index. In a year where a commodity like copper has rallied +50% the indexes have to rebalance to bring copper representation back down to the correct ratio. This means the funds tied to these indexes will have to sell copper, oil, silver, etc in order to match the rebalanced index structure.

According to fund flows 2010 was a year where the perceived safety of bonds was still preferred to stocks--but that is changing. A total of $39 billion flowed out of equity funds in 2010 and an astounding $271 billion flowed into bond funds. Investors were putting new cash into the safety of bonds over worries of a second recessionary dip. However the last two months has seen money begin to flow out of bond funds and back into equities. If it were not for the European debt crisis we would likely be seeing some major money flows back into equities.

By the looks of things S&P earnings are going to be at new record highs this year as all that new money finds its way into the economy. Cost cutting during the recession has made companies leaner and more cost efficient. As spending improves so will their profits. While we know there will be ups and downs in the market in 2011 the prevailing direction will be higher.

Since 1950 there have been 61 first weeks of trading and 38 of those were positive including this past week. When there is a positive first week there is an 87% correlation to a positive gain for the entire year. When there is a decline in the first week there is only a 50% correlation to a decline for the rest of the year. This past week the SP-500 was up 13.86 or 1.1%--a good sign for the year.

So we've got our first major earnings this week, a ton of debt being auctioned in Europe and a market still climbing higher--the question is...

HOW DO WE MAKE MONEY ON IT?

We've got two plays lined up this week--the first is bullish and the second is a 'both ways' trade with a high probability of success.

Our first trade is on a stock with a history of running higher into earnings--and often doing even better after they are announced. We'll be taking a bullish position with a twist that I think you'll love!

Our second play is on a high volatility tech stock with earnings coming up this month. We can buy both puts and calls out until February for less than two dollars giving us a very high likelihood of success--exactly the way we like it!

We've got two trades lined up on a market ready to blast into earnings season so let's get going...

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