8/19/2010 9:12:36 AM

Retailers caught a bid on earnings expectations and helped lead the market higher...

Recommendation:
Buy shares of DIA to cover and buy DIA to open long positions at a limit price of $104.00.
Buy shares of QQQQ to cover and buy QQQQ to open long positions at a limit price of $45.25.
Buy shares of SPY to cover and buy SPY to open long positions at a limit price of $109.11.

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: Short at $105.19
QQQQ: Short at $45.91
SPY: Short at $110.65

Daily Trading Action

The major index ETFs opened modestly lower and sold off for most of the first half hour. From there, the move was higher until around 2:00pm when the bears took control and sold off into the close. The Dow and NASDAQ-100 closed just below their 200-Day Moving Averages (DMAs). The Russell-2000 (IWM 62.81 +0.19) mimicked the major indexes while the Semiconductor Index (SOX 332.10 +3.50) added more than one percent. The Bank Index (KBE 22.93 +0.08) rose about one third of one percent and the Regional Bank Index (KRE 22.46 +0.06) added about one quarter of one percent. The 20+ Yr Bonds (TLT 104.53 +0.28) barely changed but it was enough to achieve a new 52-week high. NYSE volume decreased to anemic levels with just 861M shares traded. NASDAQ share volume also fell to an anemic level with just 1.630B shares traded.

Aside from the weekly crude oil inventory report, there were no economic reports of interest released. Crude oil inventories fell by -818K barrels, while expectations were for a draw of around one million barrels. That report was released an hour into the equities trading session and did little to affect the price of oil.

Seven out of ten economic sectors in the S&P-500 moved higher led by Consumer Discretionary (+0.9%) as retailers caught a bid with the group finishing 1.7% higher on the day. Energy (-1.1%), Utilities (-0.5%), and Health Care (-0.1%) were the losing sectors.

Implied volatility for the S&P-500 (VIX 24.59 +0.26) rose one percent while the implied volatility for the NASDAQ-100 (VXN 25.98 +0.06) was nearly unchanged.

The yield for the 10-year note fell one basis point to close at 2.64. The price of the near term futures contract for a barrel of crude oil fell thirty-three cents to close at $75.42.

Market internals were positive with advancers leading decliners 7:4 on the NYSE and by a few percent on the NASDAQ. Up volume led down volume by a bit less than 2:1 on the NYSE and by just over 2:1 on the NASDAQ. The index put/call ratio rose 0.35 to close at 1.89. The equity put/call ratio rose 0.04 to close at 0.67. When the put/call ratio is near 2.0, the brakes are on hard to prevent a significant slide.

Commentary:

Wednesday's trading action saw slight gains achieved on light volumes. Once again, after an initial dip, the bulls moved the major indexes higher and then gave up most of those gains in the late afternoon session. Thursday will be another Fed long-term bond buying day (conducting open market operations) which is likely to see some private holders sell into the guaranteed buyer (the Fed). This could provide a liquidity fueled rally for equities. The Dow ETF (DIA) was able to close at its 200-DMA, even though the Dow itself hasn't yet confronted this resistance level.

All three major index ETFs moved into trading states. Recall that a trading state suggests that the security won't continue to relentlessly move in a given direction but rather, will bounce between support and resistance levels. With the 200-DMAs just overhead, we think there is a high probability that the major indexes will pull back before moving higher. We will reverse to long positions on a negative economic report, weak open based on foreign indexes, or whatever catalyst we can find as the BIAS for the major indexes continues to be bullish. We also expect the liquidity released from long bond sales to the Fed will help power the major index ETFs higher.

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