1/4/2011 8:46:33 AM

The bulls are running and all the major indexes are back in uptrend states...

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 higher and accelerated into late morning. That final hour of the morning saw the intraday highs made and the major indexes gradually rolled over declining through the afternoon to close with healthy gains but looking weaker into the close. Still it was enough for all three to move back into uptrend states. The NASDAQ-100 was out in front with the best gains, followed by the S&P-500 and the Dow trailed with only a fractional gain. The Russell-2000 (IWM 79.60 +1.36) added 1.8% on the day as the risk trade appears to be back on. Even the Semiconductor Index (SOX 415.05 +3.23) managed a fractional gain and was able to sneal back into an uptrend state. The Bank Index (KBE 26.50 +0.59) gained more than two percent as Bank of America (BAC 14.19 +0.85) move up more than six percent to lead Dow gainers and the Bank Index. The Regional Bank Index (KRE 26.97 +0.52) also gained most of two percent. All equity indexes we regularly monitor are in uptrend states. The 20+ Yr Bonds (TLT 93.41 -0.71) gave back some of its recent gains but remains above its 20-Day Moving Average (DMA) but below horizontal resistance. NYSE volume moved back toward more normal levels with 1.058B shares traded. NASDAQ volume was also normal with 1.917B shares traded.

There were two economic reports of interest released:

• Construction Spending (Nov) rose +0.4% versus an expected +0.2% rise
• ISM Index (Dec) came in at 57.0 versus an expected 57.3

With a beat on Construction Spending and a narrow miss on the ISM Index, this was enough to allow the bulls to continue to run.

The U.S. dollar closed up about one half of one percent.

Bank of America (BAC 14.19 +0.85) led the Dow, the S&P-500, and the Bank Index (KRE) higher as it announced a settlement with Fannie Mae and Freddie Mac. The two GSEs agreed to settle mortgage repurchase obligations sold to them by Countrywide Financial for a bit less than $3B. Bank of America bought Countrywide in 2008. BAC will reserve $3B in its fourth quarter for the settlement. This removed uncertainty r.e. its mortgage repurchase obligations. BAC also signaled its intentions to settle with third parties mortgage loan buyers. All economic sectors in the S&P-500 moved higher led by Financials (+2.3%), courtesy in large part to BAC's outperformance.

Implied volatility for the S&P-500 (VIX 17.61 -0.14) fell most of one percent and the implied volatility for the NASDAQ-100 (VXN 19.07 -0.41) fell two percent.

The yield for the 10-year note rose three basis points to close at 3.34. The price of the near term futures contract for a barrel of crude oil rose seventeen cents to close at $91.55.

Market internals were mixed with advancers leading decliners 6:5 on the NYSE while decliners led advancers 7:4 on the NASDAQ. Up volume led down volume 5:1 on the NYSE and by 4:1 on the NASDAQ. The index put/call ratio fell 0.30 to close at 1.11. The equity put/call ratio fell -0.33 to close at 0.40. The level of complacency is high.

Commentary:

Monday saw a New Year get started with the bulls running away with it. The Santa Claus rally should still have one more day of seasonal effect on the market. With all of the equity indexes back in uptrend states (although the those uptrend states are a bit weak), the bulls enjoy the advantage here. With all equity indexes above all the moving averages we regularly report on, the boards is green and you have to be patient if you want to do any trading other than riding the equity markets higher.

The two things to note are that TLT (20+ year bonds) remains above its 20-DMA and is still in a trading state. It tends to move inversely to equities. In addition, the dollar rose nearly half of one percent. When long-term bond prices rise along with the dollar, it usually pressures equities to move lower. The dollar is in a downtrend state but is threatening to move higher which could break that state.

The DIAmonds opened on the upper Bollinger Band (BB), traded higher intraday and settled back at that point leaving behind a doji. The SPYders opened below the upper BB, traded higher intraday, and settle at the upped BB. The NASDAQ-100 ETF (QQQQ) opened on the upper Bollinger Band, traded higher, and finished well above their upper BB. None of these are signs of an imminent reversal. We have learned that when the market is in an uptrend (or downtrend) state, it can continue in the current direction and without a conclusive reversal signal, it is dangerous to enter a contra-trade. While it may frustrate many readers, it is important to be patient to claim the rewards of betting against the majority. To be a successful contrarian, you must choose your moments. We will continue to remain on the sidelines as we wait for a tradable top and will enter short positions when we see it.

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