1/12/2011 8:54:10 AM

Equity indexes opened higher and gave up some of those gains but still managed a positive finish...

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Stock Market Trends:

- Positions indicated as Green are Long positions and those indicated as Red are short positions.

- The State of the stock 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 an ETF position. If the BIAS is Bullish but the stock 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 ETF trade on "weaker" signals than you might otherwise trade on as the stock 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.

Best ETFs to buy now (current positions):
In cash.

Daily Trading Action

The major index ETFs opened higher then after initial confusion, the markets decided to head lower in the first half hour of trading before reversing and heading higher until around 11:00pm. From that point to one the markets drifted mostly sideways until around 1:00pm when they fell off a cliff in a matter of minutes. After about fifteen minutes the major indexes bounced but moved lower again until around 2:00pm. From that point, with all the the equity indexes we regularly monitor in negative territory (except the bank index which went to flat), equity indexes turned higher and proceeded to regain lost ground through the remainder of the session, closing higher but lower than they opened. The Russell-2000 (IWM 79.29 +032) managed a fractional gain as did the Semiconductor Index (SOX 431.52 +1.35). The Bank Index (KBE 26.32 +0.13) added about a half of one percent as did the Regional Bank Index (KRE 26.19 +0.12). The 20+ Yr Bonds (TLT 92.33 -0.52) lost the ground it gained on Monday. The NASDAQ-100 moved into a weak uptrend state joining the Semiconductor index. The other indexes we regularly monitor are all in trading states. NYSE volume lightened a bit further with just 940M shares traded. NASDAQ volume lightened a bit but was still average with 1.843B shares traded.

There was a single economic report of interest released:

• Wholesale Inventories (Nov) fell -0.2% versus an expected +1.0% increase

The report was released a half hour after the open and was significantly different than expected (inventories are being worked off). This was interpreted bullishly as declining inventories will have to be replenished. The bear side of the argument is that producers are whittling down inventories in anticipation of a slower economy. The bulls win as all economic reports suggest growth (albeit slower than desirable growth) is ahead.

With Alcoa (AA 16.33 -0.16) reporting better than expected earnings (but not better than expected whisper earnings), earnings season was kicked off with modest gains. .

The U.S. dollar was flat.

Telecom (-1.5%%), Consumer Staples (-0.1%), and Consumer Discretionary (-0.1%) moved lower on the day while the other seven economic of the S&P-500 saw gains led by Energy (+1.6%).

Implied volatility for the S&P-500 (VIX 16.89 -0.65) fell most of four percent and the implied volatility for the NASDAQ-100 (VXN 18.07 -0.60) fell three percent.

The yield for the 10-year note rose four basis points to close at 3.34. The price of the near term futures contract for a barrel of crude oil rose $1.86 to close at $91.11.

Market internals were positive with advancers leading decliners 8:5 on the NYSE and by 5:3 on the NASDAQ. Up volume led down volume 7:4 on the NYSE and by 4:3 on the NASDAQ. The index put/call ratio rose 0.19 to close at 1.43. The equity put/call ratio was nearly unchanged falling 0.01 to close at 0.54.

Tuesday, the stock market opened higher then gave up all those gains to move in to negative territory by the afternoon. It then recouped those losses and closed higher but lower than it had opened. This is essentially what we were looking for as the major indexes must move up to challenge recent highs or the upper channel boundaries.

What we saw on Tuesday was the QQQQs joining the Semiconductor Index in uptrend states. The Russell-2000, which looked ready to lead the stock market lower, rebounded Monday off of support and looked a little rocky in the early going (just like the NASDAQ-100 did) but ended with a fractional gain and looks like it might join the Semiconductors and NASDAQ-100 for a push higher. We will reiterate that when these three move in the same direction, it usually causes the stock market to move in that direction.

External worries seem to be diminishing as there have been four successful debt auctions there over the last two days (Greece, Italy, Germany, and Portugal). With the bond bears successfully contained, equities markets are looking bullish. In fact, Spain's stock market is up four percent in anticipation of a successful bond offering on Thursday.

We continue to await a signal for a top. We are specifically looking for a reversal off of resistance, but with the Semiconductors and NASDAQ-100 in uptrend states, they may not give us that yet. It may require a failure of other equity indexes before we get a tradable top. Until then, we will sit on our hands. Keep your powder dry.

Commentary:

Tuesday, the stock market opened higher then gave up all those gains to move in to negative territory by the afternoon. It then recouped those losses and closed higher but lower than it had opened. This is essentially what we were looking for as the major indexes must move up to challenge recent highs or the upper channel boundaries.

What we saw on Tuesday was the QQQQs joining the Semiconductor Index in uptrend states. The Russell-2000, which looked ready to lead the stock market lower, rebounded Monday off of support and looked a little rocky in the early going (just like the NASDAQ-100 did) but ended with a fractional gain and looks like it might join the Semiconductors and NASDAQ-100 for a push higher. We will reiterate that when these three move in the same direction, it usually causes the stock market to move in that direction.

External worries seem to be diminishing as there have been four successful debt auctions there over the last two days (Greece, Italy, Germany, and Portugal). With the bond bears successfully contained, equities markets are looking bullish. In fact, Spain's stock market is up four percent in anticipation of a successful bond offering on Thursday.

We continue to await a signal for a top. We are specifically looking for a reversal off of resistance, but with the Semiconductors and NASDAQ-100 in uptrend states, they may not give us that yet. It may require a failure of other equity indexes before we get a tradable top. Until then, we will sit on our hands. Keep your powder dry.

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