4/11/2011 9:15:57 AM

A higher open disappointed bulls as a modest sell-off saw a lower close...

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Daily Trading Action

The major index ETFs opened higher and immediately sold off until around 11:00am when a modest bounce began that faded by the lunch hour and a new sell-off began. An hour later a new bounce began that turned into a sideways move that lasted another hour before the market dove for its final trek lower. With an hour left in the session, value investors stepped in a drove the major indexes higher into the close, but all three recorded losses being unable to penetrate overhead resistsance. All three major indexes remain with a BULLISH BIAS and in trading states. The Semiconductor Index (SOX 439.58 -3.67) posted a fractional loss after opening just above its 50-Day Moving Average (DMA). The Russell-2000 (IWM 83.98 -0.89) posted a one percent loss after opening modestly higher. This marks the third day the Russell-2000 has opened higher and finished lower. Is the risk trade taking a break? The Regional Bank Index (KRE 26.76 -0.46) gave up one and one half of one percent. Likewise, the Bank Index (KBE 26.08 -0.22) posted a large fractional loss. The Finance Sector ETF (XLF 16.46 -0.15) lost nearly one percent as well. Longer term Bonds (TLT 89.88 -0.48) lost more than one half of one percent. NYSE trading volume was below average with 821M shares traded. NASDAQ share volume was below average with 1.651B shares.

There was a single economic report released:

• Wholesale Inventories (Feb) increased one percent as expected

The report was released a half hour into the session.

The U.S. dollar fell eight tenths of one percent breaking to a new low which has ominous tones for inflation globally. Normally a falling dollar supports a rise in equities until foreign holders of equities realize that a falling dollar means that their U.S. dollar denominated holdings are actually declining in value. This will help U.S. exporters to be more competitive.

Implied volatility for the S&P-500 (VIX 17.87 +0.76) 17.11 +0.21) rose more than four percent and the implied volatility for the NASDAQ-100 (VXN 19.76 +0.42) closed up two percent.

The yield for the 10-year note rose one and one half basis points closing at 3.57. The price of the near term futures contract for a barrel of crude oil rose $2.49 to close at $112.79.

Energy (+0.4%), Telecom (+0.3%), and Healthcare (+0.1%) moved higher while the other seven economic sectors in the S&P-500 moved lower led by Financials (-0.9%).

Market internals were negative with decliners leading advancers nearly 2:1 on the NYSE and by nearly 9:4 on the NASDAQ. Down volume led up volume 7:3 on the NYSE and by 2:1 on the NASDAQ. The index put/call ratio fell 0.27 to close at 1.19. The equity put/call ratio rose 0.06 to close at 0.59.

Commentary:

Friday's trading was as expected with the caveat that the strong gap up open induced an immediate strong sell-off. While we expected and received choppy trading conditions, the large red candlesticks left behind from the higher open should raise the hackles on the back of your neck. For more than a week, we have been getting a lot of price movement intraday with little change by the close. The move on Friday was different.

The key here is that earnings season gets its unofficial kick off after the close on Monday when Alcoa (AA 17.92 -0.20) reports its earnings for the first quarter. With the exception of the Russell-2000, all equity indexes are in trading states. While most equity indexes have a BULLISH BIAS, the Semiconductor Index has a NEUTRAL BIAS and the Bank Index actually has a BEARISH BIAS. This leaves a somewhat murky path to be followed.

We are mindful of the potential of a large directional move getting underway shortly. The overall BULLISH BIAS has us leaning bullish but the recent trading action has us concerned. By Wednesday, important Tech companies will begin reporting which may allay concerns over supply chain disruptions. The major indexes will either bounce early in the week into another bullish leg higher or they will break down for some sort of corrective move. We will give the bulls a chance to continue with the current BIAS but we are mindful we may need to reverse our positions shortly.

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