10/1/2010 9:11:51 AM

The major indexes gap up and rally on news that Q2 GDP growth was slightly better than expected then all those gains went away with a trip lower by a like amount and a finish in the red...

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:
Short DIA at $108.57
Short QQQQ at $49.66
Short SPY at $114.82
We are long Oct $106 DIA puts at $185 per contract ($1.85 per share) on Friday, Sept 17th.
We are long Oct $48 QQQQ puts at $94 per contract ($0.94 per share) on Friday, Sept 17th.
We are long Oct $113 SPY puts at $231 per contract ($2.31 per share) on Friday, Sept 17th.

Daily Trading Action

The major index ETFs opened higher and rallied higher until they were up approximately one percent in the first fifteen minutes then rolled over. The plunge was pretty dramatic with a bottom found in late morning with the major indexes down about one percent meaning we had a two percent move from the intraday high to the low. The major indexes spent time rallying from noon through about 3:00pm EDT and entered positive territory before once again rolling over to see selling pressure into the close and all of them closed in the red. The Russell-2000 (IWM 67.50 -0.17) lost less than one third of one percent and the Semiconductor Index (SOX 349.24 -2.55) lost about three quarters of one percent. Surprisingly, the Bank Index (KBE 22.95 +0.07) posted a modest gain as did the Regional Bank Index (KRE 22.91 +0.09). The 20+ Yr Bonds (TLT 105.51 -0.07) was nearly unchanged. NYSE volume jumped up to above average with 1.284B shares traded. NASDAQ volume also increased to above average levels with 2.401B shares traded.

There were five economic reports of interest released:

• GDP - Final (Q2) came in at +1.7% versus an expected +1.6%
• Chain Deflator-Final (Q2) came in at +1.9% as expected
• Initial Jobless Claims for last week came in at 453K roughly as expected at 457K
• Continuing Claims came in at 4.457M which matched the 4.450M expected
• Chicago PMI (Sep) came in at 60.4 versus an expected 56.0

The first four reports were released an hour before the open while the last report was released prematurely perhaps because of a leak. It was by far the most surprising report but it marked the intraday high of the day as it appears that market participants has already been trading on this information before it was released.

The end of quarter window dressing failed to move the markets higher although it did result in greater volume of shares traded. Even though the major indexes hit new intraday highs, sellers were quick to step in and the "big rally" lasted all of fifteen minutes before collapsing.

Energy (+0.1%) was the lone sector to move higher while the other nine economic sectors in the S&P-500 moved lower led by Tech (-0.6%).

Implied volatility for the S&P-500 (VIX 23.70 +0.55) about two and a half percent higher while implied volatility for the NASDAQ-100 (VXN 24.96 +0.48) rose about two percent. Both closed just above their 200-Day Moving Average (DMA).

The yield for the 10-year note rose about one basis point to close at 2.517. The price of the near term futures contract for a barrel of crude oil rose $2.11 to close at $79.97.

Market internals were mixed with advancers leading decliners by a few percent on the NYSE while the opposite was the cast on the NASDAQ. Down volume led up volume 3:2 on the NYSE and by 2:1 on the NASDAQ. The index put/call ratio rose 0.06 to close at 1.25. The equity put/call ratio was nearly unchanged falling 0.01 to close at 0.55.

Commentary:

Thursday's trading saw the major indexes give up the one percent intraday gains to eventually fractional losses. It seems that good news has been priced in and the major indexes are still stuck in a trading range. The Russell-2000 spent the day having greater relative strength than the major indexes but it wasn't able to post a positive close either. Even though Financials (-0.1%) finished lower, the Bank Index and Regional Bank Index were able to post modest gains.

Thus far, our patience has been rewarded with a gradual move lower for the major index ETFs. However, none of them have broken their uptrend support and we are looking for something to get started here shortly. We have noted a bearish divergence between several key indicators and price action for the major indexes so we believe there may be enough loss of momentum for the major indexes to collapse of their own weight soon. The end-of quarter support from window dressing was there but collapsed, perhaps due to the unexpectedly strong start to September. Whatever the reason, Friday should mark the last day of a seasonal bias to the upside.

We will continue to be patient.

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