One thing about Doug Kass, is that he is willing to stick his neck out. But it sure seems he will get it cut off this time. I don't know why he says that the advance is narrowing; instead, I see that it is rotating and broadening which is very bullish as sectors left behind are now beginning to catch up. If the break above 1000 on the SPY holds, as it did today, for another couple days (William O'Neil of IBD says 4 days are needed to confirm a breakout), it will probably head up to 1100 on its way to 1300. I don't know if it can get there by year end, but there are some that do.

Leadership is narrowing, speculative stocks are erupting, and shorts are pulling their hair out.~I still say the advance has a relatively small and finite life now....

A burgeoning fiscal deficit and the financial instability of our state and local municipalities are among two of the most significant of a number of nontraditional headwinds that consumers, corporations and investors face in the future. Though the bulls generally agree with these intermediate-term challenges (especially the spiraling deficit and a nervous U.S. dollar stalemate), they generally dismiss them both over the short term, favoring the belief that the current upside surprises in earnings will dominate the market landscape in influence.

I would argue that the aforementioned challenges are ever more predictable in consequence and will serve as a governor to further gains in market valuations. Not only are they inhibiting but they are also potentially oppressive influences that have been too readily put on the back burner in the face of a relentless market advance over the last five months.

An avalanche of spending by the public sector is now following an avalanche of spending by the private sector. In essence, we are (perhaps necessarily) fighting the slowdown with the same sort of incendiary kerosene that put us into the mess.

Profligate spending comes at a cost, a cost that we will experience sooner than later.  -  Doug Kass, August 3, 2009

There was a big move in financials and RE the past two days. Industrials are also perking up (I made a quick profit on Fluor, but would now like to get a little more before earnings on Monday). GE is both an industrial and a financial, so it has done very nicely the past 10 days, going from $12 to $14, which is almost a 20% move. I am adding to GE. Its 200 day EMA is 14.93 and if it breaks that barrier, I see it going to $20. I am using call options to add to my position (GEWLA). I also sold the Sept $17 puts today for $3.10.

Another stock to look at is the ETF for industrials: XLI. I sold puts on that today, but would also look at buying the stock or buying calls. Industrials are early cyclicals and are just now starting to move. Rather than buy BAC, I am adding to UYG by purchasing March 2010 calls at the $6 strike. UYG has a lot of BAC in it, plus the other big financial names like JPM, WFC and USB. They are at $0.70 a contract right now. If UYG goes to $10 by Jan. 1 (it was $20 last Sept), the return will be $3 on a $0.70 investment per share, which is a 400% return. But if it goes to $10, I will probably hold it till expiration because I think it might go back up to $20 while BAC is moving from $15 to $30.

Kass is stuck on his huge multi-year trading range theme (800 - 1000 on the SP500), just like Bill Gross. But if the Feds continue to support the economy and the Asian market continues its great growth and puts demand on our exports, there is no reason that the RE sector can't repair itself and unemployment can't move back down to around 6-7% over the next 12-18 months. That will ruin the bear arguments and will support a 1300 market as earnings continue to come back.

Keep an eye on the Feds. They are most important in the next 12 months in the market.

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Financial markets are driven by forward looking data and the anticipation of what is to come. This is true in both directions: down and up. Markets are now suggesting that there is much good news to come, as they drive higher and higher.

We are at the door in two of the major world markets: the S&P 500 and the NASDAQ Composite. The S&P500 finished the day Friday at 986 and is trading right at a key barrier at 1002.63 at the close on Monday, August 03. The NASDAQ Composite last traded at 1975 on Friday and is now at 2008.61 at the close, Monday.

What is leading the markets higher given the terrible levels of unemployment and recent weak economic growth in America? The markets discount the future by at least 6 months, and up to a year in times of economic clarity. What the markets see today is a much better economic landscape in the middle of 2010.

Economic stimulus of all forms is beginning to take hold. It is unfortunate there is such a lag between the time stimulus is authorized and the time it is implemented, but such is the nature of big government. Very important too, is that the banking industry has been secured. This has stopped the unwinding of credit through the firesale-selling of credit securities.

By the middle of 2010, banks and bank-like businesses (GE, GMAC, insurance cos., et al) should begin reducing their reserves against potential loan and derivative losses. The recapture of those reserves go straight to the bottom line and will fire up corporate earnings in the financial sector for several years to come. Improved earnings in the financial sector will result in somewhat easier lending standards (though not for a long time as easy as 2005). Freer lending will result in formation of new capital and expansion of industry and business. This expansion will require new employees which will reduce unemployment. Reduced unemployment will result in higher levels of consumption.

Thus begins the virtuous cycle of economic recovery. Jim Paulsen today (Monday, August 3) on CNBC made a similar case for recovery. He also talked about a potential "gap up" once the psychological barriers of SP500 at 1000 and NPQ Composite at 2000 are cleared convincingly (perhaps with the next week).  Such a gap up would begin with a next day open substantially higher than the prvevious day's close.    This happens as investors who were committed to being Bearish (who were drinking the Roubini Koolaid), change camps overnight and become reluctant Bulls.  This instant switch of sides can have dramatic effects on a market.  Paulsen thinks a 30% pop (from 1000 to 1300 in the SP500) is not out of the question.  He did not provide a time frame for this event, but it is probably by year end.

None of this is to say that there will not be pullbacks and corrections along the way. There will be. And one can be expected before year end during this potential "melt up".  There are still a lot of problems in the economy to be resolved. At times, the market will step back and see those problems, and worry once again if those problems might not thwart the recovery. And then the markets will sell off. But such pullbacks will provide new opportunities for investment and will be cut short within 4 to 6 weeks. 

Recovery is in the air.

Get cautiously long all the markets and be prepared to stop out short positions if the market gaps up.

Microsoft today at long last got a deal done with Yahoo! to partner on Search. This is the piece that has been most needed by Microsoft in its ongoing war with Google. Yahoo! has lost relevance on the Internet and needed a partner to take on the Google goliath (which as detailed earlier on Wealth-Ed is arrogant and deserves to be knocked down).  Microsoft will benefit and now becomes a more formidable opponent with almost 30% share in Search.

Bing, the new Internet Browser, was announced a few months ago and Windows OS7 is on the horizon for Microsoft, so don't write this computing pioneer off. The details of the partnership are not yet fully understood, but here is an early report from CNBC:

Microsoft  is not expected to pay an upfront fee to Yahoo , and the focus of the deal is on sharing revenue between the two companies.

Under the expected deal, Microsoft's new Bing search engine will power Yahoo's searches, according to Advertising Age, while Yahoo will handle the advertising sales, using Microsoft technology.

The deal should give Bing a giant boost in competing with Google's search engine. Google's search engine dominates the marketplace with 65 percent of U.S. Internet searches, according to figures provided by research firm ComScore. Last month, Microsoft had only 8.4 percent of the market and Yahoo 19.6 percent.

There is a chance a deal combining the powers of the second and third-ranked search engine companies would be blocked by antitrust regulators. Google and Yahoo dropped plans for an advertising partnership last year under opposition from the U.S. Department of Justice.

All of this should hurt Google and help Microsoft as will be seen in the stock value. I am a buyer of MSFT at this level and have recently doubled down by stake. $30 a share is possible by year end based on new growth prospects, existing market dominance in Office software suite and its tremendous cash hoard of $30B (which not so incidentally, is untouched by this deal, which at one time to purchase Yahoo! would have cost MSFT $47B).

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The battle between Bulls and Bears continued on Monday, July 27.

CNBC's Art Cashin and other market analysts myself among them, sees a near term correction based on an "over-bought" market. What does the term "over-bought" mean to a trader? Investopedia says: "In technical analysis, this term describes a situation in which the price of a security has risen to such a degree - usually on high volume - that an oscillator has reached its upper bound. This is generally interpreted as a sign that the price of the asset is becoming overvalued and may experience a pullback."

The preferred oscillators (cyclical indicators) are typically based on volume and relative price. The price can be relative to other stocks or indexes (Relative Strength Index) or to their own historical price (various Moving Averages). By all of this information, traders can get "a feel" for the future near term direction of the market, which is decided on emotion and momentum. Longer term, it is fundamentals that matter most. By the measurement of "fair value" based on moving price averages, most stocks are now in an over-bought condition and so are ripe for correction.

But in the medium term, later this fall and into 2010, the markets may again have to weaken to reflect an economy that is taking longer than some expect to get back on track. So, any rally following the near term correction (this week) will be cut short by economic reality in September and October.

Back from my Holiday and refreshed to think about the markets.

I am not convinced the SP500 will go much past 1000. Becaused it is at 976, it doesn't have far to go before it stops. I continue to sit on a short position in SDS options against the SP500 short ETF. But this market has confounded many pros and continued higher, so I am also long the QQQQ tech ETF in an equal weight. Tech has been and will continue to be the strongest sector in the economy.

My best guess for August (next week) is that the SP500 will go sideways and then retrace back to 900-910. This will happen as the earnings season winds down and there is little to encourage investors going forward. Looking beyond the earnings "beats" of July, there is nothing in the corporate statements to lead the markets higher. Sequential revenue growth does not impress as Q4 2008 and Q1 2009 were depression quarters. We are staring at increasing unemployment well into 2010 and real estate prices continue to grind lower, although at a slower rate. This will continue to dampen consumer demand. The upcoming "back to school" and Christmas buying seasons will be poor. Consumer sentiment surveys will reflect the negative buying behavior. That will remind everyone the economy is still lost in the woods. Those reminders will occassionally result in market selloffs.

I am still 100% invested, but am considering pulling back some to cash in my retirement accounts during the next 2 weeks to preserve the past four months' gains.

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