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WAR ROOM STRATEGY FOR TRADING WEEK OF SEPTEMBER 6th - 10th 2010

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On Monday, August 30, 2010, the market did just what I discussed a week ago, it rolled over and headed down. Without a doubt, Monday was an ugly day despite the fact a key report indicated that consumer spending increased at its strongest speed in four months in July. Not even merger and acquisition activity could easily get institutional traders on the long side. Intel announced a second buy in under a month, agreeing to pay $1.4 billion for a business of German firm Infineon which makes products for wireless telephones. Shares of Intel, which is also purchasing McAfee in excess of $7 billion, dropped 2%. 3M reported that it will ante up $943 million for Cogent, which builds computerized systems that read finger and palm prints. Exciting news came out of the health care sector, where French pharmaceutical firm Sanofi Aventis saw its $18.5 billion bid for Genzyme declined by the biotech company's board. U.S. stocks accelerated declines on Monday after remarks from U.S. President Obama did little to soothe traders worry with the slowing pace of the recovery. Obama said he and his economic team talked over additional actions to build up economic growth, which includes contemplating tax cuts for companies. SPY dropped for the whole day striking the crucial support area in the 104.40s. This is actually the same level it hit twice in the last week. We have a key bull camp at this mark which the bears have been not able to overrun for the last 3 weeks. On Tuesday, August 31, 2010, stock-index futures pointed to another day of losses on Wall Street as a distinct sell off in Tokyo and continuing economic anxieties soured sentiment prior to the release of U.S. housing and consumerconfidence data.

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The psychology behind recent price action on SPY suggests traders are feeling the pressure of uncertainty with economic data in days ahead offering possibilities for discontent. World stocks fell dominated by worries the U.S. economy is sliding back into a recession, prompted further flows into safe-haven assets. The yen, popular for carry trades at times of economic stress, floated back near a 15-year high against the dollar after traders brushed off Japan's endeavor to weaken the currency, the Swiss franc soared against the euro and dollar, and yields on benchmark German government bonds hit record lows. Growing U.S. economic concerns will likely draw investors faraway from riskier assets and push-up the yen, keeping pressure on Japan to intervene directly in currency markets for the first time in more than six years. Crude prices, viewed as a proxy for world economic growth, also received pressure, extending losses to date in August to 6.5% and staying on course for their largest monthly decline since May. However, a large bombshell of news hit. Consumer confidence increased modestly in August. Airline stocks reversed earlier losses easing concerns among investors over a softer economy which may lead to less flying. The financial sector rebounded sharply on news pending home sales increased by 5.2%. Economists were forecasting a 0.1% increase. Consumer discretionary stocks also exploded upward after this report. Remember, home equity lines finance purchases in the retail sector. Too little overall confidence continues to be depressing markets, that is unsurprising considering that the most visible elements of economic growth, jobs growth and the unemployment rate, have continued to be disappointing. Moreover, the housing marketplace remains a crucial source of weakness. Stocks ended their toughest August since 2001, battered by a wave of

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disheartening data that cast doubt about the faltering economic recovery. Investors now enter September, a month that is historically challenging for the stock market. September declines usually come as companies begin issuing warnings well before third-quarter results and mutual-fund managers get back to work following the typically light volume in the summertime. On Wednesday, September 1, 2010, the stock market soared higher on the better-than-expected manufacturing report. The manufacturing sector posted strong gains after the Institute for Supply Management released its manufacturing index, which said manufacturing activity unexpectedly rose to a reading of 56.3 in August. Economists have been looking for the ISM index to drop to a reading of 52.9. This was the first time this index has increased in four months. The buying was massive as more and more institutional traders went long at higher and higher levels suggesting a significant short term reversal of psychology by market participants. This manufacturing report suggests that even though the manufacturing sector recovery has slowed somewhat over the past quarter or so, the recovery is continuing at a healthy pace. Then more big news hit. Chinese manufacturing increased in August for the first time in four months and also the Australian economy saw its best development in 3 years. Wall Street compiled its best day in eight weeks on strong manufacturing data in the US and China. By the end of the day, it was clear, economic data which range from June house prices to August manufacturing conditions points to ongoing but slow development in the U.S. economy, casting considerable doubt that you will see a double-dip recession.

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This psychological reversal to the bullish side was so profound that SPY broke above its 55 hour moving average line. On Thursday, September 2, 2010, the a 34 hour moving average crossed above the 55 hour. Data indicated that first-time claims for jobless benefits declined slightly a week ago. First-time filings for unemployment benefits fell by 6,000 to 472,000 in the latest week, the Labor Department said Thursday. Investors are closely watching employment data for signs of improvement in the job market. Factory orders also climbed, rising 0.1 percent in July. The rise in orders backs up a report Wednesday showing the manufacturing sector continues to expand. Major indexes jumped in excess of 2 percent Wednesday following a surprising rise in manufacturing activity. As I discussed a week ago, merger and acquisition activity will continue. The Burger King hamburger chain agreed to be acquired by private equity firm 3G Capital. On Friday, September 3, 2010, U.S. stock index futures rose on Friday after data showed the decline in employment was less than expected in August. This week's burst of buying has largely been sparked by new data on jobs, manufacturing and home sales that, while still weak, suggest fears of a double-dip recession may have been overblown. The news hit that the unemployment rate rose to 9.6%. Nonfarm payrolls fell by 54,000 in August, less than the 90,000 drop economists had forecast. Retail stocks exploded upward on the news as investors reacted bullishly to data showing the U.S. economy shed fewer jobs than expected in August while private-sector payrolls expanded more than economists anticipated.

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Airline stocks edged higher Friday as August traffic reports and economic data directed market anxiety away from the threat of a second recession. Sectors that are considered responsive to economic growth including technology and commodities were the top gainers among mid-cap stocks. Volume should start to pick up beginning next week as institutional traders and money managers look to put new money in for the new quarter. My overall opinion of SPY and the market as a whole is you must be on the sidelines in cash right now. In other words that you should book profits in your shorts and move to the security of cash. SPY, after 3 tests of the 104.30 support during the last 2 weeks, has stopped being in a downtrend. We are in a sideways trading range and until a clear trend develops, you ought to be on the sidelines or playing the long side with very strict and tight stop losses set up. I hope you enjoy this report and if you think this report was good, you've got to see my blog. You can look over my shoulder as I trade throughout the trading day via Facebook or Twitter, watch GuerillaStockTrading TV, get live news stories that impact your trading account in real time, and more. Thank you and happy improved trading. Lance Jepsen, GuerillaStockTrading.com

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