WED. JUL. 2 THOUGHTS

The most common query around here the last 24 hours has been for a more in-depth explanation as to what sparked that brief yet sharp rally yesterday morning particularly in regard as to why it is of the opinion of more than a few people that Lehman (LEH) sparked the upward wave. LEH has been absolutely thrashed in recent weeks as discussed in great detail in this blog. There have been rumors of bankruptcy or a takeunder or writedowns or a liquidity crisis or any of a myriad of other things. Yet, Morgan Stanley (MS) upgraded Lehman (LEH) yesterday morning. LEH has been watched incessantly by most market observers as a barometer of the state of the financial system. What that told us was that if a venerable brokerage house such as MS risked its reputation over a call of this, the danger was minute that something horrible would happen to LEH in the immediate-term. The market opened sharply lower in the morning yet LEH opened slightly higher and kept rallying. So, this how that rally took shape: people short stocks like Goldman Sachs (GS) or Merrill Lynch (MER) much less big-time money managers noted the rally in LEH. People who had made a lot of money really fast as well as bargain hunters then took the brokers up. After that, the process repeated in financials like banks (Citicorp –C or Bank America – BAC for example); shorts covered and bargain hunters came in. Then, shorts and bargain hunters noted that the recent weakest sector (financials) was the strongest sector in the early going and the process repeated in much of the rest of the market, particularly big cap tech. Suddenly, the market mushroomed in a vacuum as sellers evaporated. This type of action occurs rather infrequently because it is so rare that one stock can lead a market, but this indeed is exactly what occurred yesterday morning.

Overnight, markets were firm worldwide with the futures in the U.S. shaking off a slew of weak retail news and downgrades to trade nicely higher. Looks like there is going to be some further short covering on the open ahead of the holiday.

UNH- warned badly. Stock trading negatively as this blog is being written. If it gets positive, it is arguably the trade of the day with an immediate-term price target of 26 and a move possible to 27.

YHOO- rumors all over the place with MSFT again. Likely an A-B-A2 off of open, but probably a better candidate to stay away from overall.

ALDN- warned badly. Likely an A-B-A2 to downside, but particularly so if it opens around 11.

DTG- very weak yesterday; if it breaches yesterday’s low, it is likely a short.

MYGN,CELG,RIMM- strong yesterday (along with other big cap biotech and tech). If they open stronger and go negative with market still up, any of them are shrots, but with a quick trigger. Avoid the idea if the market is rallying hard.

GM- downgraded. Had huge run-up yesterday. If market strong, looking for A-B-A2 to upside.

MER, GS, LEH- MER downgraded. If they open higher, looking to short MER in particular thru unch.

MDRS, RMD, BRS- on Cramer last night.

SBUX- closing 600 stores. This will likely be viewed as a positive because it shows SBUX trying to restructure. If it opens around 16 to 16.25, looking for A-B-A2 to upside.

FDO- awesome earnings. Probably A-B-A2 to upside if it opens around 22ish.

Good luck today.