7/28/2011 9:11:50 AM
Debt Ceiling, Greek Bailout, Durable Goods report, and Fed Beige book cause concern...
Recommendation:
Take no Action.
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Stock Market Trends:
- ETF Positions indicated as Green are Long ETF positions and those indicated as Red are short positions.
- The State of the stock market is used to determine how you should trade. A trending market can ignore support and resistance levels and maintain its direction longer than most traders think it will.
- The BIAS is used to determine how aggressive or defensive you should be with an ETF position. If the BIAS is Bullish but the stock market is in a Trading state, you might enter a short trade to take advantage of a reversal off of resistance. The BIAS tells you to exit that ETF trade on "weaker" signals than you might otherwise trade on as the stock market is predisposed to move in the direction of BIAS.
- At Risk is generally neutral represented by "-". When it is "Bullish" or "Bearish" it warns of a potential change in the BIAS.
- The Moving Averages are noted as they are important signposts used by the Chartists community in determining the relative health of the markets.
Best ETFs to buy now (current positions):
Short DIA at $124.37
Short SPY at $132.59
Short at $59.24
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Value Portfolio:
We are long TBT at $32.50 from June 16th. (TBT closed at $32.95 on July 27th)
We sold short one contract TLT Aug $98 Calls at $1.80 per share on June 16th
We sold short one contract TLT Sep $98 Calls at $2.13 per share on June 16th
(TLT closed at $95.66 on July 22nd so the contracts we sold are more than two dollars out of the money. Time value on all option contracts we sold continues to erode which means we can buy them back for less than we sold them for or, if price stays below $98.00, let them expire worthless and keep all the money.)
Daily Trading Action
The major index ETFs opened lower, slid lower for the first hour, bounced for the next hour and slid lower the rest of the session with the largest one day loss recorded since June 1. This moved the S&P-500 into a downtrend state, the NASDAQ-100 from an uptrend to a trading state, and the Dow remained in a trading state. All three closed below their 20-Day Moving Averages (DMA) and the S&P-500 closed below its 50-DMA. This left all three in trading states with a BULLISH BIAS but all have warned of a possibility to move to a BEARISH BIAS. The Semiconductor Index (SOX 393.13 -13.34) fell -3.3%!. The Russell-2000 (IWM 79.97 -2.46) fell -3.0%! The Regional Bank Index (KRE 24.75 -0.53) fell more than two percent closing below its 20-DMA. The Bank Index (KBE 23.02 -0.56) fell -2.4% as did the Finance Sector ETF (XLF 14.83 -0.36). Long term bonds (TLT 95.66 +0.01) closed flat. The BIAS of longer term bonds is BULLISH and it remains in a trading state. NYSE trading volume was average with 1.099B shares traded. NASDAQ share volume was heavy with 2.370B shares traded.
In addition to the weekly crude oil inventory report, there were four economic reports of interest released:
- MBA Mortgage Purchase Index for last week showed a decline of -5.0%
- Durable Goods Orders (Jun) fell -2.1% versus an expected rise of +0.5%
- Durable Goods excluding Transportation (Jun) rose +0.1% versus an expected +0.5% rise
- Fed Beige Book was released and showed more slowing of the economy in many regions
The first three reports were released an hour or more before the open. The Fed Beige Book was released at 2:00pm EDT.
The U.S. dollar closed down eight tenths of one percent.
The yield for the 10-year note rose three basis points to close at 2.98. The price of the near term futures contract for a barrel of oil fell $2.19 to close at $97.40.
Implied volatility for the S&P-500 (VIX 22.98 +2.75) rose fourteen percent as did the implied volatility for the NASDAQ-100 (VXN 24.70 +3.12). This is the highest closing value since mid-March of this year. We now must watch for a potential top here.
Market internals were negative with decliners leading advancers 8:1 on the NYSE and by 7:1 on the NASDAQ. Down volume led up volume 16:1 on the NYSE and by 11:1 on the NASDAQ. The index put/call ratio rose 0.42 to close at 1.53. The equity put/call ratio rose 0.08 to close at 0.67.
Commentary:
Wednesday saw the largest sell-off since June 1st and the fear index (implied volatility) is the highest it has been since the mid-March lows. All the equity indexes made significant moves lower and threaten to challenge either recent lows or their 200-DMAs, for those that remain above those important levels.
We continue to monitor three factors that will affect U.S. equity markets:
- U.S. Debt Ceiling negotiations to avoid a reduction to the U.S. AAA credit rating
- European sovereign debt stability and bailouts
- Q2 Earnings season where some 300 companies are set to report in the coming week
The House will vote on Thursday to see if they can't get a resolution passed to forward onto the Senate. Senate majority leader Harry Reid says he won't allow it to pass and the President has threatened a veto and the deadline is August 2nd.
The larger problem continues to be the European Union having to prop up insolvent countries debt with funds from stronger economies, namely Germany and France.
We still believe that this earnings season and guidance will provide a lift for the market. If, however, analysts take down future earnings expectations, this currently positive factor will turn into a negative at some point in the not too distant future. We will remain short until we see signs of a bottom.
We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.
