The Russell 3,000 makes up about 98% of the US equity market, and below we highlight the stocks in the index that are up the most so far in 2010. These names are all up 100% or more year to date. With a third of the year left, Wabash National (WNC) holds onto the top spot with a gain of 265.08%. Somaxon Pharmaceutical (SOMX) ranks second at 253.70%, while Applied Energetics (AERG), IDT Corp (IDT), Acme Packet (APKT) and Isilon Systems (ISLN) are the rest of the names with YTD gains of more than 200%. The most recognizable name on this list is probably NetFlix (NFLX), which is currently up 150.32% in 2010. A few other noteworthy stocks on the list of big winners include Crocs (CROX), 3PAR (PAR), MBIA (MBI), OpenTable (OPEN), and Las Vegas Sands (LVS). It will be interesting to see how much this list changes by the end of the year.

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As the U.S. dollar approaches an important bottom and U.S. stocks appear to be near a pivotal top, we here at EWI are prepared for trend changes. But most investors will be caught off guard, as there doesn’t appear to be any fundamental rationale for markets to turn now. So we’ve highlighted a few items that are likely to become front-page news after the next wave of decline has begun. Most prognosticators and Monday-morning quarterbacks will blame the decline on events like these, but, in reality, markets make the news (not the other way around).

Future Headline: Euro Weakens on Belgians’ Waffling

Current clues: The three regions of Belgium are seeing increasing tension that may lead to a break-up. What would happen to its sovereign debt obligations, which stand at 100% of GDP, should the language-divided country splinter' Keep in mind that this country is larger than Greece in terms of its share of global GDP (.8% versus .6%).

By Rom Badilla

Stocks continued to rise for a second day and Treasuries fell after pending sales of used homes and retail data came in better than expected. Investors bid up equities and sold Treasuries as they await Friday’s job data, which if disappointing can cause the markets to shed its gains since yesterday. The euro ended slightly stronger while government bonds in European countries were mixed after ECB’s press conference earlier today.

Sentiment

Major averages are holding modest gains ahead of employment numbers Friday morning. Economic data drove the morning action after the Labor Department said that filings for jobless benefits fell by 6,000 last week and a bit more than economists had expected. Separate data, on second quarter productivity and July factory orders, was in-line with expectations. However, the latest pending home sales showed a surprise increase of 5.3 percent in July. Economists were looking for no change. After a 255-point rally Wednesday, the data was enough to keep the bullish momentum alive and now the Dow Jones Industrial Average is up 20 points heading into the final hour. Trading is slow, with about 4.7 million calls and 3.9 million puts traded. Volume will pick up early Friday in reaction to the jobs data, and then slow to a crawl tomorrow afternoon heading into the three-day Labor Day weekend.

Bullish Flow

Bullish flow detected in Anadarko Petroleum (APC), with 23,850 calls trading, or 2x the recent average daily call volume in the name. Shares are up $1.81 to $50.50 after The Australian published a story saying that APC is on BHP’s (BHP) radar screen as a possible acquisition target: "A senior figure in the global energy industry is convinced that the 'second target' for BHP is Anadarko Petroleum Corporation, telling The Australian he believed the US oil and gas independent was firmly on BHP’s radar. BHP declined to comment for this article." In options action, the focus is on APC Sep 50, 52.5 and 55 calls. Nov 55 calls are among the most actives as well.

Hovnanian Enterprises, Inc. (HOV)

F3Q2010 Earnings Call Transcript

September 2, 2010 11:00 am ET

Ireland-based advertising titan WPP Group plc. (WPPGY) reported encouraging results for the first half of 2010. Its results were driven by strength across all geographies except for a modest decline in the European region. Expectations of revenue outperformance for the rest of 2010 are to some extent offset by worries over the Eurozone crisis and sustainability of US growth.

Ahead of tomorrow's employment report we wanted to highlight some interesting trends ahead of the release.

The first chart below highlights the average magnitude of the surprise in non farm payrolls (NFP) relative to expectations for each month of the year. For this chart, we took the absolute average of the difference between the actual and estimated change in NFP for each month since 1998. As shown in the chart, reports in September (for month of August) are actually where economists have been closest to estimating the actual change in NFP. On average, economists either under or overestimate the actual number by 46K. The next closest month is November (for month of October) where the average margin of error is 58K. October has historically been the worst month for economists in predicting the change in NFP for the prior month. The consensus forecast for reports released in the month of October are typically 80K above or below the actual reported number. (Click to enlarge)

Since late April, U.S. stock assets have labored in an extensive period of corrective activity. Bulls believe that the pullback is helping to restore health to the markets. They contend that the ”weak” always run for the hills, providing opportunity for savvy shoppers to buy great bargain companies at discounted prices.

Bears explain that the lengthy period of volatile price movement is merely a prelude to the next great disaster. Not only will sovereign debt default fears be troublesome, but austerity programs to help alleviate unsustainable deficit spending will damage economic prospects. On top of that, bank balance sheets will be exposed, real estate will “double dip,” and stock prices will erode rapidly.

4:20 PM, Sep 2, 2010 --

GLOBAL SENTIMENT

There’s always a bull market somewhere… it just so happens that it appears to be in commodities. Crude has rallied just over $3/barrel in the last 2 days and is fast approaching the 20 day MA; in October at $75.60. The bulls are back in the driver’s seat; our targets are $77.25 and then $78.60. 54 BCF injection on today’s AGA in natural gas. Our suggestion remains scaling into long in November futures and November call spreads. Our targets are $4.50, $4.75 and then $4.94.

Indices broke above the 50 day MA and should test the 200 day MA in the coming sessions; perhaps tomorrow depending on the jobs number. That level in the Dow is 10,350 and in the S&P 1107. December 10-year notes broke the 20 day MA today, 30-year bonds have yet to do so; that level is 131’31. We think a major top is in the making and have advised NOB spreads and bearish options exposure in 10-year notes.

We've heard some commentary today noting that the first Friday of September has typically been a rough day for the market. We went back and looked at the Dow's performance on all of the first Fridays of September since 1900 to see what the numbers actually look like. Below is a list of all of them.

As shown, the average change for the Dow on all 109 days since 1900 has been +0.22%. This is pretty positive considering the average change for all days since 1900 has been about +0.03%. The median change is strong as well at +0.21%. The worst first Friday of September came in 2001 when the Dow declined 2.39%. The best first Friday of September came in 1932 when the index climbed 4.21%. Over the last 10 years, the index has been up 5 times and down 5 times on these days, and the index was up 1.03% on the first Friday of September last year. So really, the first Fridays of September haven't been that bad at all.

Momenta Pharmaceuticals, Inc. (MNTA) – Shares of the biotechnology company spent the better part of the trading session on the decline, falling as much as 3.5% in afternoon trading to an intraday low of $14.38. The stock had more than doubled toward the end of July, rallying 122.6% from $11.77 up to $26.20 in a matter of two trading sessions, but those gains proved to be short-lived. MNTA’s shares spent the final week of July and the month of August in a downward spiral, slipping 46.2% from its 52-week high of $26.20 on July 26, 2010, down to a low of $14.10 on August 31, 2010. One options investor observed today does not seem to think Momenta’s shares have as yet bottomed out. The pessimistic player initiated a ratio put spread to position for the price of the underlying stock to extend losses through expiration in January 2011. The trader purchased 4,000 puts at the January 2011 $12.5 strike at a premium of $2.25 each, and sold 8,000 puts at the lower January 2011 $10 strike for premium of $1.00 apiece. Net premium paid to establish the transaction is reduced to just $0.25 per contract. The investor is prepared to make money should MNTA shares plunge 14.8% from today’s low of $14.38 to breach the effective breakeven price of $12.25 by expiration day. Maximum potential profits of $2.25 per contract are available to the ratio-spreader if shares fall 30.45% to settle at $10.00 at expiration. MNTA’s shares last traded at a 52-week low of $8.70 back on November 3, 2009.

Collective Brands, Inc. (PSS) – The holding company of Payless ShoeSource, Inc. and Stride Rite Corp. realized a 9.8% pullback in the price of its shares today to secure a new 52-week low of $12.41 after revealing that second-quarter sales in stores open for at least one year declined 6.4%, while total U.S. revenue plunged 7.1%. PSS reported second-quarter results after the closing bell on Wednesday, posting earnings of $0.32 a share, and disappointing analysts expecting the firm to rake in net income of $0.45 a share. It looks like the sharp decline in shares, however, did not deter one contrarian options trader from positioning for a Collective Brands rebound by October expiration. The investor appears to have established a bullish risk reversal play, selling 2,000 puts at the October $12 strike at a premium of $0.55 each in order to purchase 2,000 calls at the higher October $14 strike for premium of $0.50 apiece. The trader pockets a net credit of $0.05 per contract on the risk reversal and keeps the full amount as long as PSS shares exceed $12.00 through expiration. Profits above and beyond the credit received today start to amass if the price of the underlying stock jumps 12.8% to exceed $14.00 by expiration day in October. Options implied volatility on PSS is down 8.9% at 52.84% following earnings.

Hedge funds were burned by plummeting equities markets in August, according to one industry benchmark.

Credit Suisse’s Liquid Alternative Beta Index dropped 1.14% last month, leaving it up 1.81% on the year. But that wasn’t nearly as bad as the losses posted by the broader markets, with the Standard & Poor’s 500 Index dropping 4.7%.

We continue to find the MarketGrader app very useful when narrowing down initial stock screens (check it out in the SeekingAlpha App store if you have a chance). For this note, we used the app to identify a list of fundamentally solid stocks in a new uptrend, as defined by the Average Directional Index, or ADX(14) index. To create the list, we created a universe of stocks in an uptrend that have an ADX(14) value above +20, which signals strengthening upward momentum. We then reduced the size of this universe by only focusing on stocks that are rated as a "Buy" by MarketGrader's quantitative scoring system. All of the stocks in this list have MarketGrader scores above 60--the higher the score, the better.

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I last touched on this topic in a post last October, and it's worth reading again. One excerpt:

Lost in the discussion of job creation and losses is what sort of jobs are being created ... and how much they pay.

The implications are enormous for the middle class, and anyone paying attention should be noticing the increasing bifurcation among Americans as the middle is eroded, while both ends of the barbell (higher end, lower end) get crowded. I called this the coming "pooring of America" back in 2007, 2008 - haven't used that term much lately, but this New York Times article does a good job of highlighting what is going on even as we get net 'job creation'. [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance']

Historians would be very familiar with one of the great investor myths. Any historian knows that history is just a rough guide to the future and that it does not repeat itself. Yet investors all over the world are desperately dredging up numbers from as long ago as 80 years back in an effort to predict the future of markets. It doesn’t work.

Let us start with the reason for this process. Despite the hype all economists, investments advisors, financial analyst, investment bankers and pundits cannot do the one thing that they are promising to do. They cannot predict the future. No algorithm, no economic equation, no political analysis can do this. Yet they continue. The financial business is a lot like Hollywood. They are selling dreams.

Maybe you want to buy blue chip Dow dividend stocks, but you don’t have much faith in price appreciation, given the market’s performance in 2010 thus far. Selling covered calls often allows you to lock in a much higher yield than the current dividend yield of most dividend paying stocks.

We screened for the highest at the money covered call trades for the Dow 30, and came up with yields ranging from 8.54% to 10.17%. Pretty nice yields, especially when you consider that the annual dividend yields for these 5 dividend stocks range from just 2.18% to 3.20%. Given that these option trades are all 6 to 8 month trades, their annualized yields are even higher, as you can see below:

By Rom Badilla

The National Association of Realtors reported that more people signed contracts to purchase a home than the previous month. Pending Home Sales, which is a leading indicator of home activity and provides insight on economic growth, increased by 5.2 percent in July on a monthly basis. Economists were expecting sales to decline by 1.0 percent following a revised prior period drop of 2.8 percent. While the gain is encouraging, keep in mind that the sales level is improving off a low base and is far and away from offsetting the massive drop of 29.9 percent experienced in May. On a year over year basis, Pending Home Sales is down 20.1 percent. (Click to enlarge)

The Swiss franc is back to all-time highs against the euro, and the extrapolations have begun. This morning, Bloomberg reports that UBS expects the franc to remain strong for the entire decade:

The Swiss franc will stay strong and investors should hold it as a proxy for the old German deutsche mark as the currency benefits from economic growth and its status as a haven, UBS AG said.