10/28/2010 9:15:54 AM

With semiconductors heading higher like a rocket to the moon, the NASDAQ-100 was able to make a higher close but it is lonely at the top...

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

Daily Trading Action

The major index ETFs opened lower and tried to move higher a bit more than the first half hour and then gave up and moved rapidly lower into late morning when the bulls once again, asserted themselves. That effort was cut short around lunch time and trade was too the downside through the lunch hour. By 1:30pm, the bulls coordinated a successful counterattack and the major indexes began to lift and continued to move higher into the close. This left the Dow and S&P-500 to close in negative territory but the NASDAQ-100 closed in positive territory. The Russell-2000 (IWM 70.51 -0.18) posted a small loss while the Semiconductor Index (SOX 370.45 +11.09) reached escape velocity as they rocketed up 3.1% on the day! The bank indexes made modest gains with the Bank Index (KBE 22.637 +0.04) edging into positive territory and the Regional Bank Index (KRE 22.94 +0.05) posting similar gains. The 20+ Yr Bonds (TLT 99.22 -0.88) fell most of one percent and now looks ready to bounce. NYSE volume was light with 1.021B 963M shares traded. NASDAQ volume was nearly average with 2.025B shares traded.

In addition to the weekly crude oil inventory report, there were four economic reports of interest released:

• MBA Mortgage Applications (10/22) increased by 3.2%
• Durable Goods Orders (Sep) rose +3.3% versus an expected +1.8% rise
• Durable orders ex-transportation (Sep) fell -0.8% versus an expected +0.2% rise
• New Home Sales (Sep) came in at a seasonally adjusted 307K versus an expected 299K

The first report was released two and a half hours before the bell. The next two reports were released an hour before the open. The final report was released a half hour into the session.

The U.S. dollar closed higher and very near recent highs, although it was unable to breach that level (yet).

Tech (+0.4%) led the way forward on the back of the semiconductor outperformance. Financials (+0.1%) was the only other sector to move higher. The eight out of ten economic sectors in the S&P-500 to lose ground were led by Materials (-0.9%).

Implied volatility for the S&P-500 (VIX 20.71 +0.49) gained more than two percent while the implied volatility for the NASDAQ-100 (VXN 21.57 -0.24) fell one percent. We have a tale of two markets which won't last too long.

The yield for the 10-year note rose seven basis points to close at 2.71. The price of the near term futures contract for a barrel of crude oil fell sixty-one cents to close at $81.94. The U.S. government weekly crude oil inventory report showed an increase of 5.01M barrels.

Market internals were mixed with decliners leading advancers better than 2:1 on the NYSE and by 8:5 on the NASDAQ. Down volume led up volume 7:4 on the NYSE while up volume led down volume 7:4 on the NASDAQ. The index put/call ratio fell 0.40 to close at 1.30. The equity put/call ratio rose 0.05 to close at 0.65.

Commentary:

Wednesday's trading action showed a split personality with investors/traders climbing all over themselves to get longer in semiconductors. This powered the NASDAQ-100 to a positive close while the Dow and S&P-500 were hit pretty hard. Still, it was a marvel to watch the bulls come from behind as the bears had them on the ropes and let them go (mixing metaphors, you have to love artistic license).

Wednesday, the intraday high, shortly before the close matched the intraday high on Monday. I still see the markets weighted down as the bulls push the NASDAQ-100 to new heights. This continues to occur as the dollar moved up to challenge recent highs but closed short of topping that. We would speculate that if the dollar were to break out higher, this would finally deflate the bullish optimism in equities traders, but we haven't yet see the dollar bulls able to achieve that.

One reason I remain a bit of a longer term pessimist:
Before Thursday's open, Santander (STD), Spain's biggest bank, said it would miss its financial goals for the year and reported a 26% decline in third-quarter profit. This is a very public explanation of why the large U.S. banks haven't been particularly strong as well as this is still left over from the global financial crisis and isn't going away soon.

Bonds now have a chance to bounce. With the 200-Day Moving Average not far below, bonds could still be pressured a bit more but bonds are oversold here. If bonds do bounce here, we think this will pressure equities and the bullish fever may finally break.

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