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Bullish Optimism Continues Despite...

12/6/2010 9:06:09 AM

The bulls are able to force the market higher despite poor payrolls and higher than expected unemployment...

Recommendation:
Take no action.


Daily Trend Indications:

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 higher and immediately moved higher to reach positive territory within the first hour of trading. The major indexes slid off their highs in the final hour of the morning but the noon hour saw the bulls step in and buying pressure continued through the afternoon. In fact, it was only in the final minutes of trading when the bulls became a little too enthusiastic that there was any consequence to the sustained buying. The bears put in a large downward move on heavier volume in the final five minutes. This left all the major indexes with positive closes but a warning was clearly given in the final minutes with the S&P-500 and NASDAQ-100 closing just under their early November highs. The Dow isn't that far off of its highs and the Russell-2000 (IWM 75.67 +0.54) continues to lead equity indexes higher, closing at a new high not seen since January '08. The Semiconductor Index (SOX 412.43 +1.87) posted a fractional gain as did the bank indexes, with the Bank Index (KBE 23.89 +0.24) rose one percent and the Regional Bank Index (KRE 23.97 +0.22) showed a similar gain. Both bank indexes are approaching the underside of their 200-Day Moving Averages (DMAs) which they haven't closed above since early August. The 20+ Yr Bonds (TLT 94.89 -0.75) posted another fractional loss and closing not far above its recent low at $93.81. NYSE volume and NASDAQ volume were both quite light.

There were seven economic reports of interest released:

  • Non-farm Payrolls (Nov) came in at +39K versus an expected +130K
  • Non-farm Private Payrolls (Nov) came in at +50K versus an expected +140K
  • Unemployment Rate (Nov) came in at 9.8% versus an expected 9.6%
  • Hourly Earnings (Nov) were flat (+0.0%) versus an expected +0.1% rise
  • Average Workweek (Nov) came in at 34.3 hours as expected
  • Factory Orders (Oct) fell -0.9% versus an expected -1.3% fall
  • ISM Services (Nov) came in at 55.0 versus an expected 54.5

The first five reports were released an hour before the open and the last two reports were released at 10:00am.

The U.S. dollar (-1.2%) accelerated its fall but closed at support. This sustained the advance in equities.

All ten economic sectors in the S&P-500 closed higher led by Financials (+2.6%) for the second straight session.

Implied volatility for the S&P-500 (VIX 18.01 -1.38) fell seven percent and the implied volatility for the NASDAQ-100 (VXN 19.77 -1.65) fell eight percent.

The yield for the 10-year note fell three basis points to close at 2.97. The price of the near term futures contract for a barrel of crude oil rose $1.19 to close at $89.19.

Market internals were positive with advancers leading decliners 5:3 on the NYSE and by 3:2 on the NASDAQ. Up volume led down volume by nearly 3:1 on the NYSE and by 2:1 on the NASDAQ. The index put/call ratio rose 0.05 to close at 1.15. The equity put/call ratio rose 0.06 to close at 0.52. The level of complacency remains extreme.


Commentary:

Friday's trading saw light trading volume with a continued advance despite very bad economic news. While the economic reports were significant enough to move futures markets from positive to negative territory at the open, the immediate buying activity ignored the poor payrolls data and the bullish optimism carried the day. Market internals show significant complacency on the part of market participants. While we are entering a seasonally bullish period, and while we see several equity indexes just entered uptrend states, we are concerned that this move has been like the building of a house of cards. The foundation is lacking in that this move is becoming parabolic as the major indexes approach the resistance of previous highs even as volume continues to lighten.

Since we continue to miss the opportunity to get long, we are now looking for some form of correction to occur prior to our entry into new positions. The dollar is likely to bounce here which will cause equities to slide a bit as they get ready for the final challenge to move to new highs. We will stay in cash another day in anticipation of a better entry.

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

 

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