9/7/2010 9:15:45 AM
Non-payrolls came in better than expected and market participants bid up stocks to where the major indexes are at resistance...
Recommendation:
Take no action unless there is a rally back up to Friday's closing price, then look for an updated intraday alert.
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:
Long at DIA $102.80
Long QQQQ at $44.76
Daily Trading Action
The major index ETFs opened higher and continued to press higher until an economic report was released at 10:00am EDT which made market participants more bearish. Although the slide was halted by late morning, the rest of the session was spent fighting back up to the level reach just prior to the release of that economic report. For the Dow, the level was the 200-Day Moving Average (DMA). The S&P-500 is still below that level and the NASDAQ-100 was able to settle just above that level. The Russell-2000 (IWM 64.33 +1.13) continues to lead the major indexes higher as the Semiconductor Index (SOX 328.71 +5.39) has elected to participate as well. The Semiconductors have actually been creating drag and just reached their 20-DMA. It shifted t to a trading state, joining all the other indexes we regularly monitor. The Bank Index (KBE 23.13 +0.40) and the Regional Bank Index (KRE 22.48 +0.38) both rose most of two percent. The 20+ Yr Bonds (TLT 103.58 -1.30) lost 1.2% but it opened down two percent so it actually moved higher from the open.
There were six economic reports of interest released:
- Non-farm Payrolls (Aug) came in at -54K versus an expected -120K
- Non-farm Payrolls-Private employers (Aug) came in at +67K versus an expected +44K
- Unemployment Rate (Aug) came in at 9.6% as expected
- Hourly Earnings (Aug) rose 0.3% versus an expected rise of +0.1%
- Average Workweek (Aug) came in at 34.2 hours as expected
- ISM Services (Aug) came in at 51.5 versus an expected 53.0
The first five reports were released an hour before the open. The last report was released a half hour after the open.
The major indexes caught quite a bid on the released of the payrolls numbers since they were markedly better than expected. The ISM Services was worse than expected, however and caused a sell-off and put a limit on how far the major indexes would climb late in the day.
The dollar continues to move lower, falling 0.5% against a basket of foreign currencies.
All ten economic sectors in the S&P-500 moved higher led by Financials (+2.2%) and Tech (+1.7%).
Implied volatility for the S&P-500 (VIX 21.31 1.88) and implied volatility for the NASDAQ-100 (VXN 21.97 -1.97) both fell eight percent. Both measures of implied volatility broke down below their 200-DMAs and are at their lowest levels since early May.
The yield for the 10-year note rose eight basis points to close at 2.71. The price of the near term futures contract for a barrel of crude oil fell forty-two cents to close at $74.60.
Market internals were positive with advancers leading decliners 7:2 on both the NYSE and the NASDAQ. Up volume led down volume 7:1 on both the NYSE and the NASDAQ. The index put/call ratio fell 0.07 to close at 1.39. The equity put/call ratio fell 0.01 to close at 0.56.
Commentary:
Friday's trading saw another gap up open on the surprisingly good payroll numbers. The bullish sentiment carried over to trading until a poor ISM services number crushed that momentum. Still, the bulls were able to bring the major indexes back up to the 10:00am level by the close, but no further.
What do we have to look forward to? Well, volume traditionally goes back to normal after Labor Day and traders return from their summer holidays. With the Dow at the 200-DMA, the NASDAQ-100 just over this level, and with the Russell-2000 just a hair's breadth under this level, U.S. equities markets look to be set to reverse. However, every investment newsletter publication I have seen is predicting a move lower, due primarily to seasonality.
The implied volatility has, however, dropped to its lowest level since May 3rd, and is now well below its 200-DMA. This means that option writers (these are the professionals) are willing to sell options at a discount rate. These professionals don't see the sky falling at this time, which makes me think that we would see the pause that refreshes before another move higher rather than a descent into a new bear market (which seems to be the consensus). Being a natural contrarian, I am inclined to take the other side of that bet and will stay long for now.
One thing to note is that the long bonds (TLT) opened two percent lower but came back from that deficit to close down just 1.2%. This means there is more interest in long-term fixed income investing, even with the latest rise in equities. This is the other side of the trade that predicts gloom and doom for equities. The smart play, then, would be to pick up some put options if we can get an intraday move up to Friday's closing prices. We will buy October puts for the major indexes if we see a rally back up to Friday's closing prices. Look for an intraday update if that happens.
We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.
