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MA Fails to Inspire...

8/31/2010 8:49:06 AM

The usual lift from sizable M&A activity failed to emerge as the major indexes gave back most of Friday's gains...

Recommendation:
Take no action.


Daily Trend Indications:

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:
In Cash.


Daily Trading Action

The major index ETFs opened lower, moved up to or very close to Friday's closing price and then rolled over after a half hour. The rest of the session was spent in choppy trading which pressed lower through the day with a spectacular increase in volume at the close which left a big red bar (Japanese Candlestick) for the day, almost erasing all of Friday's gains. The Russell-2000 (IWM 60.30 -1.35) mimicked the major indexes losing more than two percent. The Semiconductor Index (SOX 313.58 -8.18) lost 2.5% to achieve its lowest close of 2010. It is just above its 400-Day Moving Average. The Bank Index (KBE 21.39 -0.52) gave up -2.4% completing erasing Friday's gains as did the Regional Bank Index (KRE 20.94 -0.77) which lost more than three percent. With the exception of the Russell-2000, all equity indexes remain in downtrend states with all equity indexes having a BEARISH BIAS. In contrast, the 20+ Yr Bonds (TLT 107.37 +2.02) gained most of two percent as investors continue to flee to the relative safety of fixed income. NYSE volume became even lighter with just 812M shares traded. NASDAQ share volume was also light with just 1.569B shares traded.

There were three economic reports of interest released:

  • Personal Income (Jul) rose +0.2% as expected
  • Personal Spending (Jul) rose +0.4% versus an expected rise of +0.3%
  • PCE Prices - Core (Jul) rose +0.1% as expected

All three reports were released an hour before the open. They were mostly in-line with expectations with consumers spending slightly more than expected. This should have provided a neutral or slightly positive sentiment.

From a news standpoint, the day was all about Mergers and Acquisitions. Intel Corp (INTC 17.96 -0.41) announced plans to acquire wireless unit Infineon Technologies for $1.4B in cash. Drug maker Sanofi-Aventis (SNY 28.63 -0.29) offered $18.5 billion in cash to acquire Genzyme (GENZ 69.91 +2.29). Genzyme immediately rejected the offer as inadequate. The acquisition battle continued between Hewlett-Packard (HPQ 38.56 +0.56) and Dell (DELL 12.02 +0.13) for 3Par (PAR 31.82 -0.64). Over the weekend, 3Par selected HP's bid of $30 per share superior to the offer of $27 per share that it had already accepted from Dell. Finally, Dow component 3M (MMM 79.65 -1.35) will pay for $430 million, or $10.50 for each share of Cogent (COGT 11.09 +2.18).

M&A, which generally provides a significant lift to equities markets, did little to help prop up the markets as bears dominated the action as stocks plummeted to lose most of Friday's sizable gains.

All ten economic sectors in the S&P-500 moved lower led by Financials (-2.2%).

Implied volatility for the S&P-500 (VIX 27.21 +2.76) soared 11.3% and implied volatility for the NASDAQ-100 (VXN 27.89 +1.58) rose a more modest six percent.

The yield for the 10-year note fell four basis points to close at 2.55. The price of the near term futures contract for a barrel of crude oil fell forty-seven cents to close at $74.70.

Market internals were negative with decliners leading advancers 3:1 on the NYSE and by nearly 4:1 on the NASDAQ. Down volume led up volume 7:1 on the NYSE and by 5:1 on the NASDAQ. The index put/call ratio rose 0.54 to close at 1.61. The equity put/call ratio was nearly unchanged rising 0.01 to close at 0.58.


Commentary:

Monday's trading saw more bearish sentiment as Friday's heavier volume gains were eclipsed by Monday's light volume "give it back" day. With financials being the worst sector, both the Bank Index (KBE) and Regional Bank Index (KRE) achieved their lowest closes of the year. The semiconductor index (SOX) also achieved a new low for the year. It appears that another retest of the lows for the major indexes in order. We will be watching the Russell-2000 as it has tried to lead the markets higher and hasn't made new lows when other equity indexes were swooning. A move to retest its lows (achieved last week) would make it almost certain that the major indexes will retest their lows. We will be looking to get long on a successful retest but will remain in cash for another day as the markets could actually move to a new low here.

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

 

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