9/8/2010 8:09:32 AM

The expected dip happens and not much else, yet...

U.S. markets were closed on Monday, September 6th in observance of Labor Day.

Recommendation:
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:
Long at DIA $102.80
Long QQQQ at $44.76

Daily Trading Action

The major index ETFs opened lower and the bulls attempted to move them higher for the first fifteen minutes but the bears then slammed the door closed as the NASDAQ-100 reached the unchanged mark. The Dow and S&P-500 never came close before beginning an express elevator ride down for the next fifteen minutes. The rest of the day was spent moving sideways to gradually lower with the Dow and S&P-500 closing off a bit more than one percent. The NASDAQ-100 had a more modest loss, which actually bodes well for equities. The NASDAQ-100 closed back just below its 200-Day Moving Average (DMA) though. The Dow and Russell-2000 had closed about even with their 200-DMAs and pulled back, which is normal on the first attempt to pass that line. The Russell-2000 (IWM 63.11 -1.22) fell two percent while the Semiconductor Index (SOX 322.31 -6.40) fell a like percentage and sits, once again, below its 20-DMA. The Semiconductors continue to be a drag on the advance of the major indexes. It shifted t to a trading state, joining all the other indexes we regularly monitor. The Bank Index (KBE 22.49 -0.64) fell most of three percent and the Regional Bank Index (KRE 21.94 -0.54) fell two and a half percent. The 20+ Yr Bonds (TLT 105.70 +2.12) rallied two percent. Volume was light with the NYSE seeing only 828M shares and the NASDAQ saw only 1.672B shares traded.

There were no economic reports of interest released. Instead, U.S. markets followed foreign markets as they traded lower when U.S. markets were closed for the Labor Day holiday. Wednesday will see the Fed release its Beige Book and an hour before the close, consumer credit numbers will be reported for July with the consensus being for a loss of -$5.25B.

The major indexes were led lower by fears that the large banks are holding bad debt. The latest concerns are over European PIIGS (Portugal, Ireland, Italy, Greece, and Spain) sovereign debt, but these same banks also hold toxic mortgage debt from residential loans that are underwater since the housing market topped in 2006, other consumer debt, and commercial property backed mortgages. We expect that the fear over assets that banks are holding won't fully subside until the global economies once again begin to expand robustly which will in turn cause a rise in housing prices, commercial property values, etc.

The dollar reversed its slide rising 0.9% against a basket of foreign currencies. Most of the gain was made against the Euro, which fell 1.4% against other currencies. The Yen continues to be at its highest value versus the dollar in fifteen years.

All ten economic sectors in the S&P-500 moved lower led by Financials (-2.4%).

Implied volatility for the S&P-500 (VIX 23.80 +2.49) rose twelve percent while implied volatility for the NASDAQ-100 (VXN 23.99 +2.02) rose nine eight percent. The VIX now sits just above its 200-DMA while the VXN sits just below its 200-DMA.

The yield for the 10-year note fell ten basis points to close at 2.61. The price of the near term futures contract for a barrel of crude oil fell fifty-one cents to close at $74.09.

Market internals were negative with decliners leading advancers 3:1 on both the NYSE and the NASDAQ. Down volume led up volume 5:1 on the NYSE and by 5:2 on the NASDAQ. The index put/call ratio rose 1.08 to close at 2.47. The equity put/call ratio rose 0.04 to close at 0.60. That is a huge one day move which shows just how worried investors are about a September swoon. With that sort of insurance buying, however, the option writers won't want the market to move markedly lower until they are able to get that index put/call ratio back down toward 1.0.

Commentary:

Tuesday's trading was just a reaction to foreign markets amid worries over what will happen to banks holding European sovereign debt. The bulls made a tepid attempt with the NASDAQ-100 able to rally back to its Friday closing price for few seconds before being mobbed. The other major indexes didn't come close to reaching their Friday closes and were underwater the whole session. We elected not to pay the premium for put options on QQQQ due to the spike in implied volatility. As we warned, we were looking to buy puts if the major indexes were able to rally back to their closing prices and, implicitly, we could get a good price on the put options due to low implied volatility. That option is, at least temporarily, off the table.

Volume hasn't yet returned to pre-summer levels, but we would expect that situation to be corrected by next week. As we suggested, various significant equity indexes were are key levels such that they were likely to reverse and they did so. However, due to the fact that every investment newsletter publication we have seen is predicting a move lower, we are taking a contrarian position and believe the market will instead climb the wall of worry after a brief trip lower. We would expect any move lower to be contained at the major index 20/50-DMAs.

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