6/23/2011 9:05:57 AM

The bears take over after the Bernanke Q&A...

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Value Portfolio:
We are long TBT at $32.50 from June 16th
We sold short one contract TLT July $98 Calls at $1.19 per share on June 16th
We sold short one contract TLT Aug $98 Calls at $1.80 per share on June 16th
We sold short one contract TLT Sep $98 Calls at $2.13 per share on June 16th

Daily Trading Action

The major index ETFs opened lower then rose into late morning and then declined slightly in mostly sideways trading until just before the FOMC released its policy statement at 12:30pm. The major indexes then continued a modest rise into an intraday double top when Fed Chairman Ben Bernanke began a Q&A session. That session lasted just under an hour and the bears used the opportunity to seize control and from the start of the speech into the close there was an acceleration to the downside which left the major indexes closing down about two thirds of one percent. The acceleration to the downside was on increased volume in the final half hour of trading. The Dow dipped back below its 20-Day Moving Average (DMA) while the NASDAQ-100 was barely able to maintain a position above its 200-DMA. The Semiconductor Index (SOX 396.73 -1.88) lost most of one half of one percent. The Russell-2000 (IWM 80.04 -0.62) posted a fractional loss on the day in-line with that of the major indexes. The Regional Bank Index (KRE 25.04 -0.23) and the Bank Index (KBE 23.48 -0.19) both posted fractional losses as the Finance Sector ETF (XLF 15.00 -0.09) lost about one half of one percent. Of all the equity indexes we regularly monitor, only the bank index remains in a downtrend state. Long term bonds (TLT 96.65 +0.06) closed relatively flat. NYSE trading volume increased but was still below average with 856M shares traded. NASDAQ share volume was average with 1.584B shares traded.

In addition to the crude oil inventory report, there were two economic reports of interest released:

• MBA Mortgage Index for last week came in at -5.9% versus the prior week's +13.0%
• FHFA Housing Price Index (Apr) came in at +0.8% versus the March -0.4% reading

The first report was released two and a half hours before the open and the latter report was released a half hour into the session.

The U.S. dollar rose nearly four tenths of one percent. Virtually all of this rise came after Fed Chairman Ben Bernanke began his Q&A session as it became apparent that no new statements would be issued. If another round of quantitative easing isn't going to happen, apparently there is more interest in the U.S. dollar or at least those who have shorted the dollar appear ready to cover their bets.

The yield for the 10-year note rose most of a basis point to close at 2.99. The price of the near term futures contract for a barrel of oil rose $1.24 to close at $95.41. Crude oil inventories experienced a draw down of -1.711M barrels.

Implied volatility for the S&P-500 (VIX 18.52 -0.34) nearly two percent and the implied volatility for the NASDAQ-100 (VXN 20.20 -0.16) fell less than one percent. While the VIX broke below its 200-DMA, the VXN closed just below that important level. Usually, when the market breaks lower, implied volatility jumps but that didn't happen today so the jury is still out. It appears that we will have a snap back upward in implied volatility and a potential retest of recent implied volatility highs.

All ten economic sectors in the S&P-500 closed lower led by Consumer Discretionary (-0.8%) and Tech (-0.8%).

Market internals were negative with decliners leading advancers 7:5 on the NYSE and by 2:1 on the NASDAQ. Down volume led up volume 2:1 on both the NYSE and the NASDAQ. The index put/call ratio fell -0.16 to close at 1.17. The equity put/call ratio fell -0.07 to close at 0.53.

Commentary:

Thursday saw the market open lower but trade up to positive territory aligned with the FOMC decision to leave rates unchanged. The move lower began with Bernanke's lack of saying anything new. He seemed to stay with a pretty tight script and none of that allowed for another round of quantitative easing. As you will recall, the lift in equities continued despite poor economic reports in the belief that a sluggish economy would cause another round of quantitative easing. In the perceived absence of that, some of the long bets are being withdrawn.

With all equity indexes rolling over and with longer term bonds closing relatively flat, the stage is set for the bears to wreak havoc. Since implied volatility actually fell yesterday, even though equities moved lower late in the session, something has got to give. It is likely that option writers will demand extreme premiums as we move into capitulation. This should result in a scary sell-off and the question remains whether the S&P-500 will remain above its 200-DMA. For SPY, this is a level around $126.35 and moving higher. The bears will gun for that level and we will have to see if the bulls have the conviction to meet the bears and provide support.

We will sit on our hands for a day to see if the "counter Fed" trade will work. The "counter Fed" trade means that the market usually moves in the opposite direction it moved after an FOMC policy statement is released. Since yesterday's move was lower, then this would argue for a move higher on Thursday. However, Asian markets closed lower and European markets are being pressured significantly (down one percent or so). This will likely lead to a significantly lower open for U.S. markets which will likely see the S&P-500 test its 200-DMA in the near future, perhaps in a scary dip lower on Thursday.

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