5/3/2011 8:43:08 AM

Osama Bin-Laden death brings uncertainty...

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Value Portfolio:
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Daily Trading Action

The major index ETFs opened higher and then raced lower in what would become a see-saw pattern throughout the day that would descend through the session. All the major indexes logged losses. The Semiconductor Index (SOX 445.06 -4.50) posted a one percent loss and the Russell-2000 (IWM 85.38 -1.01) lost nearly 1.2% on the day. The Regional Bank Index (KRE 26.49 -0.25) posted a nearly one percent loss. The Bank Index (KBE 25.54 -0.07) posted a fractional loss as did the Finance Sector ETF (XLF 16.31 -0.07). Longer term Bonds (TLT 93.89 +0.15) posted a fractional gain after accounting for the forty cent dividend. NYSE trading volume was nearly average with 935M shares traded. NASDAQ share volume was average with 2.063B shares traded.

There were two economic reports released:

• Construction Spending (Mar) rose +1.4% versus an expected 0.0% rise
• ISM Index (Apr) came in at 60.4 versus an expected 59.7

Both reports were released a half hour after the open. February's Construction Spending was revised lower from -1.4% to -2.4%. Otherwise both reports were essentially as expected.

With the announcement that Osama Bin Laden had been killed on Sunday evening (U.S. time zones), the dollar immediately spiked and the major indexes opened higher. The "Sell the News" mentality was adopted as the market has been overbought and potential reprisals by Al Quaeda loom as potential disruptions to the fragile economic recovery worldwide.

The U.S. dollar rose one tenth of one percent recording its first gain since mid-April.

Implied volatility for the S&P-500 (VIX 15.99 +1.24) rose eight percent and the implied volatility for the NASDAQ-100 (VXN 18.13 +1.59) rose nearly ten percent.

The yield for the 10-year note fell one basis point to close at 3.29. The price of the near term futures contract for a barrel of crude oil fell forty-one cents to close at $113.52.

Four of ten economic sectors in the S&P-500 moved higher including all three defensive sectors. Healthcare (+1.0%), Consumer Discretionary (+0.3%), Consumer Staples (+0.2%), and Utilities (+0.1%) were the winners while the other six sectors moved lower led by Energy (-1.3%).

Market internals were negative with decliners leading advancers 3:2 on the NYSE and by 2:1 on the NASDAQ. Down volume led up volume 7:4 on the NYSE and by 3:2 on the NASDAQ. The index put/call ratio rose 0.02 to close at 1.38. The equity put/call ratio fell 0.07 to close at 0.51.

Commentary:

Monday's trading reversed the move higher as our statement that the market was now clearly priced to perfection rang true. We finally saw a united move lower by the leading indexes and the finance sector and a move higher by fixed income. With both the semiconductors and the Russell-2000 losing one percent or more after a gap up open, the U.S. equities markets are ready to break down. This move is not yet confirmed but it is something we have been expecting and is overdue. This is the third day that the NASDAQ-100 eased lower as market participants have continued to ease out of risk positions.

As we stated, this was the first trading day after the seasonally strong end of April, and the U.S. dollar finally bounced, which is something we have been expecting. Bonds are ready for a potential break out move higher.

The liquidity rally is in jeopardy. One thing that happened on Monday was that liquidity requirements to trade silver were raised. This enforced deleveraging resulted in a one day thirteen percent drop in the price of silver. This along with the small bump in the U.S. dollar is weighing on the minds of traders. Oil closed down only modestly. It is the follow-through action that can shake the markets up.

Part of the fundamentals influencing oil prices is the reasoning that if the U.S. can take out Osama Bin Laden, it can also take out Gadaffi in Libya. That may stabilize the country and oil should begin flowing there again.

Unfortunately, implied volatility spiked before we were able to purchase put options and the trade we wanted to put on for the value portfolio (VXX) never hit our limit price. We will continue to be patient to see how far this nascent downward move can go.

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