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Fed Minutes Induce a Sell-Off...

4/6/2011 9:10:14 AM

When the FOMC released the market sold off into the close...

Recommendation:
Take no action.

My subscribers have access to the StockBarometer Market Chat room as usual. The chat room password is "mark55" without the quotes, of course. I look forward to seeing you there.


Stock Market Trends:

Stock Market Trends

- ETF Positions indicated as Green are Long ETF 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):
Long DIA at $117.22 (adjusted for $0.23 dividend on 03/18/11)
Long QQQQ at $54.90 (adjusted for $0.11 dividend on 03/18/11)
Long SPY at $127.45 (adjusted for $0.55 dividend on 03/18/11)

Click here to learn more about my services and for our best ETF portfolios.

Value Portfolio:
We hold no value positions at this time.


Daily Trading Action

The major index ETFs opened lower and moved in mixed fashion during the first half hour before moving steadily higher through the morning session and peaking at the end of the lunch hour. An easing the began leading up to the released of the FOMC minutes at 2:00pm. After initial volatility, the major indexes began to head lower, a path they continued to follow in see-saw fashion into the close. All three major indexes closed lower on the day. The Dow and S&P-500 have a BULLISH BIAS while the NASDAQ-100 is shifting to a NEUTRAL BIAS. The S&P-500 and NASDAQ-100 are in a trading states. The Semiconductor Index (SOX 438.78 +9.73) soared 2.3% higher after having opened up one and three quarters of one percent and having been up three percent intraday. The Russell-2000 (IWM 85.19 +0.46) added another fractional gain after moving up intraday to touch ($85.75) its four year high at $85.74. The Regional Bank Index (KRE 26.82 -0.21) posted a fractional loss after outperforming in past sessions. The Bank Index (KBE 26.03 +0.00) closed flat. The Finance Sector ETF (XLF 16.50 -0.01) closed flat as well. Longer term Bonds (TLT 91.92 -0.37) posted a fractional gain and closed even with its 20-Day Moving Average (DMA). NYSE trading volume was light with just 687M shares traded. NASDAQ share volume was average with 1.932B shares.

There was a single economic report released as well as the FOMC minutes:

  • ISM Services (Mar) came in at 57.3 versus an expected 59.5

This report was released a half hour after the open.

The big events of the day were a speech by U.S. President Obama and the release of the Fed's March 15th meeting minutes. Obama's speech was more political posturing about the short term impact of a potential Federal government shutdown as Democrats and Republicans battle for long term budget reduction/preservation. It is probably somewhat obvious to voters that our elected Federal officials are hardly capable of addressing the real problems at hand, that is long term deficit reduction while preserving economic growth. However, we are still in the early innings and Obama's speech didn't provide credible leadership on the matter, yet.

The release of the meetings from the last Fed Open Market Committee meeting showed that several members (Fed President's) are concerned over inflation getting a foothold and see the economy as improving. This weighs against another round of quantitative easing but there are still enough members that didn't express those concerns that QE3 is still on the table. The minutes were released at 2:00pm.

In addition, there was an announcement after the market closed on Monday by Texas Instruments (TXN 34.69 +0.58). TXN announced it has offered to acquire National Semiconductor (NSM 24.06 +9.99) for $6.5 billion causing the entire semiconductor industry to rally with NSM moving up 71% on the day!

The U.S. dollar was nearly unchanged after gapping higher at the open and then moving steadily downward through the session. This pattern has occurred for five of the last seven sessions.

Implied volatility for the S&P-500 (VIX 17.25 -0.25) fell a bit more than one percent and the implied volatility for the NASDAQ-100 (VXN 19.46 -0.59) fell three percent.

The yield for the 10-year note rose six basis points closing at 3.49. The price of the near term futures contract for a barrel of crude oil fell thirteen cents to close at $108.34.

Materials (+1.1%), Consumer Discretionary (+0.4%), Energy (+0.3%), and Consumer Staples (+0.1%) moved higher on the day while the remaining six economic sectors in the S&P-500 moved lower led by Telecom (-0.7%).

Market internals were positive with advancers leading decliners 5:4 on the NYSE and by 21:20 on the NASDAQ. Up volume led down volume 3:2 on both the NYSE and the NASDAQ. The index put/call ratio fell 0.73 to close at 1.21. The equity put/call ratio fell 0.02 to close at 0.58.


Commentary:

Tuesday's session performed as expected. By that I mean it was choppy and moved around quite a bit intraday but at the end of the session, the major indexes hadn't changed much. The biggest change was the large push under semiconductors as the M&A activity was invigorating for an index that had slid in four consecutive sessions prior to Tuesday. The major indexes appear to be leaning toward moving to a common BULLISH BIAS which will make it hard for the bears to dislodge the bullish momentum in place singe the turnaround after the mid-March bottom.

The Russell-2000 is threatening to break above multi-year highs which is an obvious signal that the risk trade is still being embraced. A failure here, however, would be a strong signal that the bears haven't yet ceded control. Next Monday, Alcoa (AA 18.05 +0.49) reports its quarterly earnings. That is the unofficial start of earnings season. We will then hear from the Tech companies that are affected by Japan's economic disruptions. Until then, we expect more difficult conditions (choppy trading) as the major indexes ready to challenge overhead resistance. Until we see a clear change in direction, the most likely path for the major indexes is still higher.

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

 

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