4/28/2011 9:11:31 AM

The market reacted positively to the Fed maintaining status quo...

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Daily Trading Action

The major index ETFs opened higher and was a bit directionless in the first half hour before rolling over and trading lower for the next hour. From around 11:00am, the market began to move higher in anticipation of the release of the Fed policy statement at 12:30pm at which time it soared higher. Just prior to Fed Chairman Ben Bernanke's Q&A session, the markets moved lower but by the time he completed his session the market took off to the upside and continued higher almost into the close when some easing occurred. All in all, the major indexes added strong fractional gains for the day. The Semiconductor Index (SOX 450.64 +0.16) closed essentially unchanged. The Russell-2000 (IWM 85.69 +0.51) added a strong fractional gain. The Regional Bank Index (KRE 26.78 +0.29) added more than one percent as did the Bank Index (KBE 25.56 +0.26). The Finance Sector ETF (XLF 16.28 +0.10) tacked on more than one half of one percent. Longer term Bonds (TLT 92.89 -0.96) fell one percent giving back its gains from Tuesday. It shifted back to a trading state and has a NEUTRAL BIAS. NYSE trading volume was below average with 959M shares traded. NASDAQ share volume was average with 2.085B shares traded.

In addition to the weekly U.S. government report on crude oil inventories, there were three economic reports released:

• MBA Mortgage Index fell -5.6% from last week
• Durable Goods Orders (Mar) rose +2.5% versus an expected +1.8% rise
• Durable Orders ex-transportation (Mar) rose +1.3% versus an expected +1.2% rise

All reports were released at least one hour before the open. The closely watched Durable Orders ex-transportation is regarded as a proxy for business investment so its mildly better than expected reading signals a potentially higher than expected GDP reading.

Most of the day's focus was on the two-part release of the Fed Open Market Committee's (FOMC) policy statement and the Q&A session held shortly thereafter. The policy statement release saw only subtle changes to wording with the effect that the Fed would maintain ultra-low interest rates for an extended period. Once again, the FOMC viewed the rise in inflation as transitory in their statement. The market took this to mean that quantitative easing would continue in some manner.

Fed Chairman Ben Bernanke answered questions after the release of the policy statement and denied that there would be another round of quantitative easing due to "trade offs are "less attractive at this point". He said inflation has got higher and inflation expectations are a bit higher, so it's not clear that there can be "substantial" improvement in payrolls without some additional inflation risk. To get "lots of job growth, we have to keep inflation under control."

Just as Bernanke began speaking, the Fed released revised expectations for GDP growth and inflation. The last time they provided a range was just three months ago but the revisions were substantial for 2011. They took down GDP growth for 2011 from a range of 3.4 to 3.9% and reduced it to a range of 3.1 to 3.3%. They raised interest rate expectation from the range of 1.3% to 1.7% to a revised 2.1 to 2.8%. They also lowered expectations for unemployment from 8.8 to 9.0% to a revised range of 8.4 to 8.7%. The 2012 revisions weren't that large with the main factor being higher inflation.

The market rallied when he started speaking and continued to move higher when the session was completed. The latest take on this is that even though Bernanke denied there would be another round of quantitative easing, if the Fed was to sell off its $1.3T in toxic mortgage debt, those funds would be used to buy more Treasury paper, but with longer term durations than the Fed has recently focused on. The Fed will continue to maintain their balance sheet at current levels so as shorter term treasuries mature, the Fed will buy more to replace them.

The U.S. dollar fell seven tenths of one percent to close at a new two year low.

Implied volatility for the S&P-500 (VIX 15.35 -0.27) fell most of two percent while the implied volatility for the NASDAQ-100 (VXN 17.03 -0.75) fell four percent.

The yield for the 10-year note rose five basis points to close at 3.37. The price of the near term futures contract for a barrel of crude oil rose fifty-five cents to close at $112.76. The weekly report on U.S. crude oil inventories showed a rise of 6.156M barrels.

Energy was unchanged and the other nine out of ten economic sectors of the S&P-500 moved higher led by Telecom (+1.3%), Healthcare (+1.2%), and Consumer Discretionary (+1.1%). Other sectors added fractional gains.

Market internals were positive with advancers leading decliners nearly 2:1 on the NYSE and by nearly 7:4 on the NASDAQ. Up volume led down volume 2:1 on both the NYSE and the NASDAQ. The index put/call ratio rose 0.03 to close at 1.28. The equity put/call ratio rose 0.02 to close at 0.60.

Commentary:

Wednesday's trading was on below average volume on the NYSE and on average volume for the NASDAQ. We are awaiting the release of the GDP number before the open on Thursday. This is the final piece that needs to fall into place to allow the bulls to continue running the market higher. A disappointment would likely slow down or reverse the latest bullish move. GDP came in at +1.8% for Q1 versus an expectation of +1.7%. The GDP Deflator came in at +1.9% versus an expectation of +2.4%. This means that inflation was not as bad and economic growth slightly better than consensus.

Based on the results, the bulls should be running the market higher. However, with the rally on Wednesday, it is highly possible we will get a "sell the news" kind of a day on Thursday. It seems obvious that the Fed was aware of the Advance GDP number when they released their policy statement on Wednesday. There is often a counter-Fed trade the day following the release of the Fed policy statement. We will observe how the market closes before making a decision as to the likely course of trading on Friday.

We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.