This is Part II.

I tweeted out part one (as well as Emailed an Alert to our Members) earlier this morning, so I’ll take a break while you read that and get caught up

In case you are wondering, the image on the right is the explosion at China’s Tianjin port last night that registered as a 2.9 earthquake and has killed dozens and injured hundreds. It may have been an LNG accident or it may have been a chemical explosion but, either way, all 17 Republican candidates have vowed that we will not rest until the kind of laws that prevent cool explosions like this in the US are repealed so American businesses can fairly compete with China in industrial accidents.

As to the markets, suffice to say you can read yesterday’s post and be all caught up as we’re right back where we started from yesterday morning. Fortunately, we cashed in the EWJ shorts that we picked for our 5% Monthly Portfolio (see Seeking Alpha’s Premium Research to join) and the 10 Sept $14 puts we bought on Monday afternoon for 0.90 hit our $1.35 target yesterday for a very nice $450 gain, which was 50% in just 2 days!

That trade alone puts us 10% of the way to our +$5,000 goal for the month (5% of our $100,000 portfolio) and our other 3 trade ideas have contributed another $800 of their own so far (all this week) for a perfect start and $1,200 gained for the week (so far).

Now, getting back to the broader task at hand – in our previous post we discussed whether or not the markets were going to continue to pull back or if, possibly, we are consolidating for a move higher and I said that, to make that call, we should focus on the S&P 500’s top 25 stocks, which make up 44% of the indexes weighting. Those stocks are:

As I noted earlier this morning, I think XOM, CVX, AAPL, PG, IBM, INTC, HPQ, WMT have made pretty good corrections while MSFT, JNJ, JPM, T, WFC, BAC, CSCO, KO, GOOG, PFE, PEP, PM haven’t really corrected at all. The other 5 I could take or leave and that leaves us with 12 stocks that could go lower vs 8 stocks that SEEM cheap, but there’s the catch – a lot of things SEEMED cheap in July of 2008 as well!

Obviously, XOM and CVX have their own special problems, with oil down at $43 and not likely to make huge improvements (though we are long here for the holiday) – neither are stocks I’d expect to carry the S&P higher and, if anything, they will weight them down. IBM, AAPL and INTC are stocks we already have long positions on – so I won’t get into the merits there. HPQ is in the same boat and I like them too – we just didn’t need another tech…

As you can see, these 4 tech heavy-weights have been a huge drag on the S&P for the past few months, with each of them roughly 10% off their highs. On the other hand, GOOG has gone up 24% since early July, adding $100Bn of market cap in 60 days, more than making up for AAPL’s $70Bn loss over the same period.

It’s hard to compare apples to oranges, of course, but AAPL and GOOG – maybe… Either way, it’s all tech and it’s hard to say why MSFT, CSCO and GOOG are flying high while AAPL, HPQ, IBM and INTC are down in the dumps. I guess you could draw the conclusion that the internet itself is expanding and that’s good for search engines and routers but hardware sales are still depressed – partially due to the new device-oriented access we all enjoy. IBM SHOULD be benefiting from this but they are in the middle of restructuring, so a different story there.

Now the question is, are we too excited about our 3 high-flyers given weak hardware sales? MSFT’s current p/e is 31.5, historically very high. GOOG is also nose-bleeding at 31 but CSCO is “normal” at 16, which is still 23% higher than the 13 average of our 4 down tech stocks. You could use this logic to argue that our 4 depressed stocks are buys – and that’s why we’re long, but I don’t think I’d want to play GOOG and MSFT to go higher, even in a rally so, until our tech laggards turn – I think this group is a drag on the index. Point bears.

That leaves the bull camp needing PG and WMT to bring up the bottom and that’s not going to happen with the China drag so now we have to contemplate whether JPM, WFC and BAC should be so happy and yes, they should be with all the FREE MONEY the Fed is showering on them (C is in there too and GS just missed the cut).

Of course, we KNOW the Fed is going to tighten in the Fall – not much, but a little and the free ride will eventually come to an end. No reason to short them now but no reason to assume the growth that’s priced in will continue either. Still not scoring any points for the bulls…

JNJ, T, KO, PFE, PEP and PM are all consumer stocks of different stripes though PFE has it’s own special market and isn’t really discretionary and neither is JNJ’s health-care sector. Of course, PM, PEP and KO do their best to make sure there are plenty of unhealthy customers for the other two and T is a utility with a consumer product kicker. We know the bottom 80% are struggling with low wages and higher costs of living and that’s eating into their disposable income:

Of course, US Corporations have cut loose from the US long ago and mainly use this country as a source of cheap capital where their Corporate Personhood is protected by the business-friendly courts and, of course, as a tax haven where the average US corporation pays just 12% of their income in taxes – the lowest effective tax rate in the World. Having destroyed the American consumer by moving their jobs overseas, underfunding retirement programs and stifling benefits, our Corporate Masters are forced to look overseas for their actual revenue growth.

Over the last year, those overseas revenues have been in rapid decline and we’re not picking up the slack at home so there is NOTHING here that justifies the S&P trading at an all-time high – especially when it’s 10% higher than last year’s trading range with a negative overall growth rate (mostly energy/commodities dragging it down).

So, upon further examination, there is no change to our stance of being short the markets at these levels which, on the Futures this morning, are 17,400 on the Dow (/YM), 2,095 on the S&P (/ES), 4,550 on the Nasdaq (/NQ) and 1,212.50 on the Russell (/TF) and, as usual, we look to short the laggard of the set with tight stops above.

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