11/24/2010 9:15:10 AM

North Korea shells a South Korean island with reported military fatalities and civilian casualties...

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:
In cash.

Daily Trading Action

The major index ETFs opened markedly lower and after a brief move higher, see-sawed their way down to an intraday bottom shortly before noon. From that point, the see-saw began to move sideways to modestly higher into the close. All the major indexes closed below their 20-Day Moving Averages (DMAs) with the Dow closing even with its 50-DMA. The Semiconductor Index (SOX 388.27 -4.06) fell more than one percent while the Russell-2000 (IWM 72.11 -0.69) posted a fractional loss and actually closed above its lower open. The bank indexes moved lower with the Bank Index (KBE 22.10 -0.39) falling nearly two percent while the Regional Bank Index (KRE 22.73 -0.15) posted a fractional loss. In fact, the Regional Bank Index outperformed on a relative basis as investors took advantage of the move lower to acquire more shares. The 20+ Yr Bonds (TLT 97.48 +0.48) posted a fractional gain. NYSE volume was a bit light with 1.024B shares traded. NASDAQ volume was below average with 1.885B shares traded.

In addition to the release of the minutes from the last FOMC meeting, there were three economic reports of interest released:

• GDP-revised (Q3) came in at +2.5% versus an expected +2.4%
• GDP Deflator-revised (Q3) came in at +2.3% as expected
• Existing Home Sales (Oct) came in at 4.43M versus an expected 4.42M

The first two reports were released an hour before the open while the last report was released a half hour into the session.

The big news that had all stock exchanges trading lower around the world was that North Korea had fired on a South Korean island near their common border. Two South Korean Marines were killed with more than a dozen injured and at least three civilians were also hurt. Artillery fire landed on a South Korean village and military base on the island. South Korea shelled North Korean artillery positions with 80 shells leaving the total number of artillery shells fired at around 200. While opinions vary as to the cause, all of them seem to focused on internal politics within North Korea and the succession for the ailing leader of North Korea.

The Fed minute's were released at 2:00pm EST. The Fed revised their expectations for growth downward:

• 2010 GDP projections changed from a range of 3.0 - 3.5% to 2.4 - 3.0%.
• 2011 GDP projections changed from a range of 3.5 - 4.2% to a new range of 3.0 - 3.6%
• 2012 GDP projections changed to a new range of 3.6 - 4.5%

Unemployment projections also stay stubbornly high for many years, with 2010 expected to be between 9.5 - 9.7%. 2013 is expected to drop down to between 6.9% - 7.4% and the intervening years are between those two ranges.

The U.S. dollar broke resistance to close +1.3% higher, a level not seen in two months.

All ten economic sectors of the S&P-500 moved lower led by Energy (-1.9%), Energy (-1.7%), and Financials (-1.6%). Only Telecom (-0.9%) declined less than one percent.

Implied volatility for the S&P-500 (VIX 20.63 +2.26) rose twelve percent while the implied volatility for the NASDAQ-100 (VXN 21.77 +2.04) rose ten percent.

The yield for the 10-year note fell five basis points to close at 2.76. The price of the near term futures contract for a barrel of crude oil fell forty-nine cents to close at $81.25.

Market internals were negative with decliners leading advancers 10:3 on the NYSE and by 3:1 on the NASDAQ. Down volume led up volume 7:1 on the NYSE and by 5:1 on the NASDAQ. The index put/call ratio rose 0.08 to close at 1.29. The equity put/call ratio rose 0.16 to close at 0.73.

Commentary:

Tuesday's trading volume increased but was still below average in this generally light volume Thanksgiving holiday week. It appears that the shock of another act of aggression on the part of North Korea was enough to rumble global stock markets but not enough to have a lasting effect. None of the major indexes closed lower than the close just six sessions ago and only the Dow dipped below the intraday of that session. It appears that the bulls are ready to proceed in the latter part of the week with a move higher, which agrees with our forecast.

The U.S. dollar continues to rally which could cause significant resistance to a move higher. While we believe that equities are likely to move higher into the later part of this week, we will remain in cash for one more session to see if we can't get some favorable action out of the dollar that can help support a rally by the bulls.

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