Correction coming Sept/Oct? Yes and No!

Fellow Friends and Traders,

Shallow pull back, yes, correction ‘No!’ If we were to get lucky the S&Ps might retrace down to 950-60.  93% of the S&P 500 stocks are above their 50 day moving average. Nose bleed territory starts at 90%. Furthermore, shorts have fallen below 5% of the float so short covering cannot continue the rally much farther. Hedge funds are mostly long and afraid to be caught short. The fundamentals looking ahead into the third and fourth quarters should be outstanding. Presently, we are in the middle stages of a giant liquidity-driven bull market. Momentum investing reigns supreme. Nevertheless, it's probably a time for the market to enjoy a rest. The next phase will find stock selection paramount.

The rank speculation (or as the Wall Street calls it “The Dash to Trash”) in penny stocks should be an early warning for a fall. Besides, when a market stops going up on good news like INTC’s raising sales guidance Friday morning and with good economic news all this week, traders should take heed of this market situation. In addition, the S&Ps are now trading about 15 times normalized $70 EPS for next year. Given the head winds the market faces next year and beyond that's a higher-than-normal multiple of earnings. China which has lead world markets both down in '07 and up in '09 have declined these last 4 weeks and their stock market is now down over 17% from the highs reached this year.

There is a U.N. deadline set for Sep 20th for Iran to comply with international demands to drop its bid for the "Bomb". If Iran is found in violation of the U.N. resolution western allies could cut-off supplies of refined petroleum products that may start a tit-for-tat game of chicken in the straits of Hormuz with oil being the key chip. We may even look to the possibly of military force. Russia and China lined up behind Iran versus the western allies can become a brief tense but temporary moment for the markets and the world. A reminder that brings us back to the "Missiles of October" with JFK in 1963 and could be a game changer.

Obama has not shown any back bone. To please the far left he frees terrorists and now wants to prosecute CIA personnel who have prevented further attacks on America. Earlier he said he wouldn't do this. It’s scary out there. Yet when it’s all said and done I want to be fully invested going into year end. Right now I like cash and my hedged long calls. Continue to trade your brains out until more attractive pricing of equities occurs.

We continue to find great option trading ideas with the VIX so low and cheap weekly expirations. This week we were looking ahead early Thursday morning to the End of Month Markup (EOM) long trade. We caught a nice $1.75 call trade that hit $5.00 later that afternoon and nearly $8.00 into Friday morning opening rally. Our EOM markup trade became an EOM protect profit put trade as the S&Ps hit a new marginal high for the year. A Tenet #3 Trade setup allowed us to buy cheap throwaway puts for as low as $0.55 near the Friday opening high. A few hours later these puts hit $4.60.  See attached chart. Since the market has rallied almost 6% this month portfolio managers may adopt a protect-your-profit trade for Monday.

I anticipate this week will post very good economic numbers. The ISM could actually show growth with a 50+ number. If the market doesn't rally we should start focusing on the sell side. Pay attention.

Keep those cards and letters coming. I always appreciate your thoughts.

Good trading and fasten your seat belt we could be in for a bumpy ride.