Stock Market Review for Week of August 10, 2008

Broadmarket analysis is presented here courtesy of Cashflow Heaven.

WHICH WAY THIS MARKET IS HEADED

However gold, silver and the rest of the commodity sector won’t likely stay down for too long. Thursday’s inflationary CPI number, which showed U.S. consumer prices accelerating at a 17-year high pace, convinced currency traders that the Fed would refrain from lowering rates again. That assumption boosted the dollar index to a 2008 high.

So the dollar index settled Friday at an eight month high of 77.12 while the euro sells for $1.47, a six-month low. The pound closed around $1.86--you’d have to go all the way back to December 2006 to find the British currency that “cheap.” Over the last two weeks the dollar got another boost from the Russian attack on Georgia. Every time a conflict erupts overseas investors flee those currencies to the safety of the dollar.

However don’t let small news eclipse the big picture. The bottom line is a massive sea of newly created dollars over the past several years is inflationary and the only cure is raising interest rates to lessen the money supply. And with a global and US slowdown being the major concern central banks—and particularly the Federal Reserve—won’t likely be raising rates anytime soon. Which means inflation will continue and the dollar’s recent rise will likely be turned south sometime over the next several weeks. A turndown in the dollar will likely reverse the two major trends we’ve seen recently—a rising stock market and falling commodity prices.

That said the current stock trend is up and if we’re going to play we need to play the actual trend. Nowhere is the current optimism more apparent than in the financial sector. In spite of continuing bearish news the sector refused to fall—a pretty bullish sign in itself.

The financial sector (XLF) traded sideways last week in spite of continuing headwinds. Wachovia Bank (WB) announced a settlement on the auction rate security issue this past week. They agreed to buy back $8.5 billion in ARS and pay $50 million in fines. Wachovia is the 5th bank to agree to settle. The others were Citi, UBS, MS and JPM. Merrill is under fire and NY Attorney General Andrew Cuomo said he sent a letter to Merrill notifying them he will sue next week if they don't settle. In addition late Friday the AG’s office said they were broadening their probe to include Fidelity and Schwab as sellers of the debt and 25 other companies. The markets somehow overlooked this news pushing the XLF higher Thursday and Friday but you have to wonder where these financial institutions are going to find the billions of dollars necessary to buy back their poison debt and pay their multi-million dollar fines.

The most likely scenario is more bail-outs from Uncle Sam (your tax dollars at work). And the only way to do that is create more funny money out of thin air—and that is inflationary.

So gold, silver, oil and every other commodity are not going to stay down forever—but they are sure doing a great swan dive for right now. Meanwhile the techs and certain other sectors are pushing higher almost on a daily basis—the question is…

HOW DO WE MAKE MONEY ON IT?

We’ve got two high-potential trade set-ups this week—and they are both bullish.

Our first trade is on a company that just announced an incredible 99% profit increase on a 39% increase in sales—which means margins are growing like crazy. This stock has one of the brightest fundamental pictures in the markets and their chart shows it. We’re jumping aboard this upward trend at our price this week for what looks to be some outstanding profits!

Our next play is also bullish and it’s on a stock that is climbing up from the bottom in what looks to be the initial move of a much bigger climb to the upside—a climb that can make us a fortune on the right calls.