11/18/2010 8:47:56 AM

The market seemed to move without any outside stimulus, more a battle between computers searching for a directional trade to exploit...

Recommendation:
Buy shares of DIA at a limit of $110.79.
Buy shares of QQQQ at a limit of $51.75.
Buy shares of SPY at a limit of $118.71.

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 mixed and then all dove for the first fifteen minutes then reversed sharply to move higher for the next forty-five minutes. From that point on, the markets stayed in a narrow trading range chopping around all day in a sideways manner until with a bit more than an hour left in the session, the bears launched an attack that saw the markets move lower until the final half hour of trading saw some bullish buying that left the Dow and S&P-500 on either side of neutral and the NASDAQ-100 posting a gain of less than a third of one percent. The Semiconductor Index (SOX 373.85 -0.22) closed slightly lower but had been up more than one percent intraday. The Russell-2000 (IWM 70.83 +0.19) posted a fractional gain echoing the move higher of the NASDAQ-100. The bank indexes sold off pretty hard with the Bank Index (KBE 22.72 -0.39) losting most of two percent and the Regional Bank Index (KRE 22.83 -0.36) down one and one half percent. The 20+ Yr Bonds (TLT 95.61 -0.53) fell a half of one percent. NYSE volume was a little light with 947M shares traded. NASDAQ volume was a little light with 1.807B shares traded.

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

• MBA Mortgage Applications (11/12) fell -14.4%
• CPI (Oct) came in at +0.2% versus an expected +0.3% rise
• Core CPI (Oct) came in flat (+0.0%) versus an expected +0.1% rise
• Housing Starts (Oct) came in at 519K versus an expected 600K
• Building Permits (Oct) came in at 550K versus an expected 570K

All five reports were released before the open.

The U.S. dollar closed slightly lower and at its highs of the day after opening significantly lower. As we indicated in yesterday's report, the dollar is currently overbought here and we think it will need to catch its breath before attempting another leg higher. Retarding a dollar advance, China announced more details to curb inflation through capital controls. In addition, Ireland's Finance Minister agreed to meet with members of The European Central Bank (ECB) and the International Monetary Fund (IMF). The purpose is to determine whether Ireland can support its own banks or whether the country needs support of the ECB to stabilize the situation.

One of the things pressuring bank indexes was the filing by John Paulson's hedge fund indicating his abdication of positions in the large banks. Paulson was the hedge fund manager who bet the largest on the bursting of the housing market bubble and made billions of dollars for himself and clients.

Consumer Discretionary (+0.7%), Energy (+0.4%), and HealthCare (+0.1%) moved higher on the day with Consumer Staples unchanged. The other six out of ten sectors in the S&P-500 finished lower led by Financials (-0.6%). We believe the strength in Consumer Discretionary was delayed from yesterday's rosy outlook announced by retailers, including WalMart (WMT 53.77 -0.49). Perhaps even more important was Target (TGT 55.62, +2.08) with the market clearly enjoying its latest quarterly report.

Implied volatility for the S&P-500 (VIX 21.76 -0.82) fell nearly four percent and the implied volatility for the NASDAQ-100 (VXN 23.25 -0.48) fell two percent.

The yield for the 10-year note rose three basis points to close at 2.60. The price of the near term futures contract for a barrel of crude oil fell $1.90 to close at $80.44. The weekly U.S. Government report on crude oil showed a draw down of -7.29M barrels! The fall in the price of oil was a macro play on the assumption that the U.S. dollar will continue climbing in value because the draw down of U.S. crude inventories over the last two weeks has been nearly 11M barrels which will apply upward pressure to the price of oil.

Market internals were positive with advancers leading decliners 8:5 on the NYSE and by 11:10 on the NASDAQ. Up volume led down volume by fifteen percent on the NYSE and by six percent on the NASDAQ. The index put/call ratio rose 0.07 to close at 1.34. The equity put/call ratio fell 0.09 to close at 0.59.

Commentary:

Wednesday's lighter volume trading sets the market up to be able to bounce. Bulls and bears seemed to lack conviction while market participants ignored economic news, including the draw down in crude oil supplies, which was the largest in recent memory. Our cash position allowed us to watch the trading position dispassionately and we now feel certain we will have some sort of bounce. The question is, how far will the bounce carry the major indexes higher?

The dollar looks like it will take a breather here as the Irish and Chinese look set to act rationally, which will allow the Euro to move higher against the dollar and panic over what actions the Chinese may take to reign in inflation is subsiding as details become known. A move lower by the dollar will allow equities to bounce. We would like to enter long positions here but we will set limit orders as futures suggest a higher open here.

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