Trade Recommendations:
Take no action.

Daily Trend Indications:

- Positions indicated as Green are Long positions and those indicated as Red are short positions.

- The State of the 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 a position. If the BIAS is Bullish but the 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 trade on "weaker" signals than you might otherwise trade on as the 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.

Current ETF positions are:

DIA: Long at $105.26
QQQQ: Long at $46.44
SPY: Long at $111.56

Daily Trading Action

The major index ETFs opened higher and rose in the first fifteen minute before market participants waited out the released of an economic report at 10:00am. After shooting briefly higher on the release of that report, the bears took the initiative and drove the major indexes lower until they gave up by around 10:45am. The bulls patiently waited out the bears and as the indexes approached the levels of Tuesday's close, they stepped in to drive the major indexes higher. The major indexes made progress, not quite reaching the peak of the spike just after 10:00am and the bears again stepped in. That attempt was even weaker than the attempt in early morning trading and the markets began to move higher around 1:30pm. That move would last into the close with only minor weakness showing up in the final minutes of trade such that the major indexes finished within about one tenth of one percent of their intraday highs. The Dow and S&P-500 have committed to uptrend states, but the NASDAQ-100 has yet to make such a commitment. The Russell-2000 (IWM 66.31 +0.69) gained more than one percent and is poised to change to a Bullish BIAS while the Semiconductor Index (SOX 354.71 +3.46) added just under one percent and remains in a downtrend state. The Bank Index (KBE 24.54 -0.05) posted a minor loss while the Regional Bank Index (KRE 24.16 +0.05) posted a minor gain. The 20+ Yr Bonds (TLT 98.56 -0.76) again moved inversely to equity indexes with fractional loss and moved below its 50-Day Moving Average (DMA). NYSE volume remains light with just 975M shares traded. NASDAQ share volume was also light with just 2.019B shares traded.

In addition to the weekly crude oil inventory report, there were two economic reports of interest released:

• ADP Employment Change (Jul) added 42K jobs versus an expected 25K jobs
• ISM Services (Jul) came in at 54.3 versus an expected 53.0

The first report came out an hour and fifteen minutes before the open while the last report was released a half hour into the session. The June ADP Employment Change was revised upward from 13K to 19K. With employment coming in higher than expected and ISM services also continuing to show growth, market participants reacted positively to the news.

Other than the economic reports, news that China may conduct stress testing on its banks with a projected 60% loss in home values caused some intraday weakness in U.S. equities. China's overheated property market has been expected to see a pull-back but a 60% but investors were concerned over what the bursting of the Chinese property bubble could do to global economies.

Barclay's credit analysts boost U.S. banks moved the sector from market weight to overweight. This followed Moody's downgrade of the largest U.S. banks last week saying that FINREG would eventually diminish the implied government backstop of the largest financial institutions.

None out of ten economic sectors in the S&P-500 moved higher with Consumer Discretionary (+1.6%) the only sector to post more than fractional gains. Telecom (-0.1%) was the only loser.

Implied volatility for the S&P-500 (VIX 22.21 -0.42) fell most of two percent and remains clearly below its 200-DMA. The implied volatility for the NASDAQ-100 (VXN 23.22 -0.39) fell 1.7% and remains under its 200-DMA.

The yield for the 10-year note rose six basis points to close at 2.95. The price of the near term futures contract for a barrel of crude oil was nearly unchanged falling eight cents to close at $82.47. The U.S. Government reported that crude oil saw a draw down of -2.78M barrels over the last week. Analysts had been expected a draw down of a bit more than one million barrels.

Market internals were positive with advancers leading decliners nearly 3:1 on the NYSE and by 2:1 on the NASDAQ. Up volume led down volume more than 2:1 on both the NYSE and the NASDAQ. The index put/call ratio was nearly unchanged falling a single basis point to close at 1.41. The equity put/call ratio fell three basis points to close at 0.57.

Commentary:

The market has been anxiously awaiting the U.S. government payroll numbers due out pre-open on Friday. Stealing a quick glance at the number (released an hour before the open so we could see them before we published), the headline number was worse than expected, which means that the government shed more than 200,000 jobs in July. The private sector reported gains of 71K jobs mostly matching the ADP report (out last Wednesday) that just missed the 83K expected. The big surprise was that the government's report for June was revised from -125K jobs to -221K jobs. That is ugly.

With that information, future markets shifted immediately from modestly positive to negative trading down about one percent below fair value. The bears will likely mount a significant attack but the worst of the blow could come with the gap down open.

We aren't yet prepared to abandon our long positions and will watch to see the bull response to the bear attack. If the major indexes finish less than two to three percent lower on the day on heavy volume trade, then the most likely direction for the major indexes is still likely higher.

Money flow is still positive for all three major index ETFs on a daily basis. We continue to expect a minor slide backwards before the bulls re-engage to drive the markets above resistance.

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