8/24/2010 9:11:35 AM

The optimism that powered pre-market trading faded as the bulls can't sustain any sort of momentum...

Recommendation:
Sell shares of DIA, QQQQ, and SPY at market fifteen minutes after the open. This will leave us in cash but we believe that equities will bounce due to their large gap down open.

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 $104.00
QQQQ: Long at $45.25
SPY: Long at $109.11

Daily Trading Action

The major index ETFs opened higher and after surging immediately higher began to move lower within the first half hour of the open. An initial bottom was hit in late morning trading with a gradual move higher than lasted until around 2:00pm. The bears gained confidence and broke down through the morning lows in the final half hour of trading forcing the major indexes to close at/near their worst levels of the session. At this time, all the equity indexes we regularly monitor are in downtrend states with a neutral or negative BIAS with the lone exception of the Dow, which is barely hanging onto a bullish BIAS> The Bank Index (KBE 22.14 -0.15) was actually trading higher for a good portion of the session as large banks were in favor in the early going. The Regional Bank Index (KRE 21.43 -0.36) was also trading in positive territory in the early going but sellers took control and it lost more than one and a half percent on the day. The Russell-2000 (IWM 60.32 -0.83) lost 1.3% while the Semiconductor Index (SOX 323.78 -4.10) lost a similar amount. The two were trading differently early on as the Semiconductor Index lagged the major indexes and the Russell-2000 as buyers lacked conviction and the bears clearly had their way. The 20+ Yr Bonds (TLT 106.06 +0.02) was nearly unchanged. NYSE volume was extremely light with 857M shares traded. NASDAQ share volume was extremely light with 1.658B shares traded.

There were no economic reports of interest released. Instead, pre-market action was consumed with news of Mergers and Acquisitions (M&A). Hewlett Packard (HPQ 39.04 -0.81) announced it would cash to acquire 3Par (PAR 26.09 +8.05). Last week, BHP Biliton (BHP 67.13 -0.31) announced a hostile bid for Potash (POT 150.20 +0.53). Intel Corp (INTC 18.70 -0.21) had previously announced it would acquire McAfee. A rumor that Campbell Soup (CPB 36.90 +0.26) is interested in acquiring a unit of Britain's United Biscuits added to the furor.

Utilities (+0.6%), HealthCare (+0.3%), Consumer Staples (+0.2%), and Energy (+0.2%) moved higher while the other six economic sectors in the S&P-500 moved lower. It is worth noting that only Energy and the traditional safe sectors were moving higher on the day.

Implied volatility for the S&P-500 (VIX 25.66 +0.17) rose fractionally while implied volatility for the NASDAQ-100 (VXN 26.49 +0.73) rose most of three percent.

The yield for the 10-year note was unchanged closing at 2.61. The price of the near term futures contract for a barrel of crude oil fell seventy-two cents to close at $73.10.

Market internals were negative with decliners leading advancers 7:4 on the NYSE and by nearly 3:1 on the NASDAQ. Down volume led up volume by 2:1 on the NYSE and by nearly 3:1 on the NASDAQ. The index put/call ratio rose 0.06 to close at 1.57. The equity put/call ratio fell 0.34 to close at 0.39.

Commentary:

Monday's trading makes us willing to throw in the towel on a long trade for now, but it appears that futures will have the U.S. markets open significantly (more than one percent) lower. While we had misgivings about being bullish, yesterday's trading could have gone either way and we were on the losing side.

At this time, our indicators suggest that equities will move lower but the gap down open will put many traders on the opposite side of the trade. Equities have been range bound and the bottom of that range isn't terribly far below at this time (depending on the index you are looking at). With both the NASDAQ-100 and S&P-500 losing their BULLISH BIAS and the Dow looking to lose its BULLISH BIAS this week as well, it isn't time to believe in a move higher until we see a move lower. The Leading Indexes also led equities lower, which makes us bearish on immediate prospects.

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