5/2/2011 8:55:57 AM
With the maxim that no news is good news, liquidity drove the market modestly higher...
Recommendation:
Take no aciton.
Click here to access our stock chat rooms today! For a limited time, try our chat room for free. No subscription necessary to give it a try.
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):
Short DIA at $124.63
Short SPY at $133.66
Short QQQ at $58.40
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 mixed and finished mixed as well. The initial move from the open was higher but all the major indexes then moved lower fifteen minutes later. Yet another fifteen minutes later they reversed again which would lead to a move higher through the remainder of the morning. The major indexes then meandered slightly higher, lower, or sideways through most of the session with the Dow and S&P-500 rallying in the final half hour while the NASDAQ-100 sold off in the final fifteen minutes. This left the Dow and S&P-500 posting gains while the NASDAQ-100 closed with a modest loss. The Semiconductor Index (SOX 449.56 +2.02) posted a fractional gain as did the Russell-2000 (IWM 86.39 +0.31). The Regional Bank Index (KRE 26.74 -0.16) posted a fractional loss as did the Bank Index (KBE 25.61 -0.07). The Finance Sector ETF (XLF 16.38 -0.03) posted a modest loss. Longer term Bonds (TLT 93.89 +0.29) posted a fractional gain as well. NYSE trading volume was below average with 918M shares traded. NASDAQ share volume was heavy with 2.428B shares traded.
There were six economic reports released:
- Personal Income (Mar) rose 0.5% versus an expected 0.4% rise
- Personal Spending (Mar) rose 0.6% versus an expected 0.5% rise
- PCE Prices-Core (Mar) rose 0.1% as expected
- Employment Cost Index (Q1) rose 0.6% versus an expected 0.5% rise
- Chicago PMI (Apr) came in at 67.6 versus an expected 68.0
- UnivofMichigan Consumer Sentiment-Final (Apr) came in at 69.8 versus an expected 69.6
The first four reports were released an hour before the open. The other two were released fifteen and twenty-five minutes after the open respectively.
A theme has emerged where economic reports are generally coming in as expected but jobless claims are creeping higher. Earnings are beating analyst expectations by approximately average amounts. The large multinational companies are poised to do better due to a falling U.S. dollar and therefore, the Dow Jones Industrial Average (DJIA) is outperforming other equity indexes. At the same time, bond prices have risen along with stock prices. Something's got to give and longer term bond prices are set to put in a potential triple top or to break to new local highs.
The carry trade can continue until the Fed changes policy as liquidity is not going to be withdrawn by the Fed in the foreseeable future. The buying of U.S. treasuries en masse, however, will end in June. If the dollar's fall reverses, this could cause an exodus from the carry trade which wouldn't be kind for U.S. dollar denominated assets.
The U.S. dollar was nearly unchanged falling a few hundredths of one percent to close at a new two year low.
Implied volatility for the S&P-500 (VIX 14.75 +0.13) rose most of one percent and the implied volatility for the NASDAQ-100 (VXN 16.54 +0.34) rose two percent.
The yield for the 10-year note fell one basis point to close at 3.30. The price of the near term futures contract for a barrel of crude oil rose $1.07 to close at $113.93.
Six of ten economic sectors in the S&P-500 moved higher led by Energy (+1.5%). Health Care (-0.1%), Financials (-0.2%), and Telecom (-0.6%) all moved lower and Consumer Discretionary was unchanged.
Market internals were positive with advancers leading decliners 7:4 on the NYSE and by 5:4 on the NASDAQ. Up volume led down volume 3:2 on the NYSE and by a margin of just two percent on the NASDAQ. The index put/call ratio rose 0.22 to close at 1.36. The equity put/call ratio rose 0.03 to close at 0.58.
Commentary:
Friday's trading continued the move higher but is now clearly priced to perfection. The opposite of Thursday's action occurred on Friday in that the semiconductor index participated in the move higher while the financial sector moved lower. The NASDAQ-100 also eased lower for the second day in a row.
We continue to weather the storm of the last trading day of April in anticipation of a potential move lower in the near future. We don't currently have a set-up indicating an immediate move lower but there are several things to consider here:
- Seasonality favors a bearish stance beginning on Monday
- The U.S. dollar is so oversold, a reversal higher could come at any time, which will likely cause a significant sell-off for equities and commodity prices
- Bonds appear to be at an impasse where they could form a triple top or could break out higher.
The liquidity rally continues but is in jeopardy. We continue to use the example of the game of musical chairs. When the music stops, everyone must find themselves a chair and the music could stop on traders in the carry trade at any time. It is really a matter of confidence. If that confidence fails, in light of the fed completing QE2, there will be a race to find a chair (exit the carry trade) and some participants will take heavy losses trying to exit their trades.
We didn't get the potential counter-Fed trade on Thursday and no news is good news is the current premise traders are operating on. Many foreign markets are closed for a holiday and Sunday night, the U.S. reported the killing of Osama Bin Laden. This caused a dollar rally with a sell-off in precious metals and oil (dollar denominated assets). However, pre-market action shows a higher open likely for the major indexes, primarily influenced by gains in Asian and European markets. We will continue to patiently await a top here and we are looking to add put options when implied volatility again drops to the low end of recent levels.
One thing to watch is a potential trade of implied volatility. One way to do this is to buy VXX. You should be able to buy VXX this week at $22.80 or less on Monday and we will add this to the value portfolio if we are able to purchase at or below $22.10 this week.
We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.
