6/28/2011 9:03:36 AM

With volume down, Financials and Tech lead rally...

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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 $125.90
Long SPY at $134.43
Long QQQ at $58.20

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Value Portfolio:
We are long TBT at $32.50 from June 16th. (TBT closed at $33.36 on June 27th)
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

(TLT closed at $95.65 so the contracts we sold are more than two dollars out of the money with price projected to move lower. Time value on all option contracts we sold continues to erode which means we can buy them back for less than we sold them for or, if this continues, let them expire worthless and keep all the money).

Daily Trading Action

The major index ETFs opened just above flat and, after hesitating for the first ten minutes or so, began to move higher with a purpose. That move higher resulted in a series of fits and starts with major indexes moving higher then sideways then higher, etc. until they peaked shortly after 2:30pm. Downside action was still muted until selling accelerated in the final half hour leaving the major indexes to close off of their highs with the Dow and S&P-500 closing with strong fractional gains and with the NASDAQ-100 logging a +1.6% gain. That leaves the Dow closing above its high last Thursday and the NASDAQ-100 and S&P-500 not far below their respective Thursday closes. The Dow and NASDAQ-100 are in trading states while the S&P-500 is still mired in a downtrend state. Perhaps most importantly, the NASDAQ-100 closed back above its 200-Day Moving Average for the third time in the last five sessions. Friday saw a close below that important level while last Wednesday saw a close on that level. The Semiconductor Index (SOX 395.27 +2.77) posted a fractional gain. The Russell-2000 (IWM 80.56 +0.62) logged a strong fractional gain and maintained a trading state. The Regional Bank Index (KRE 24.88 +0.29) added more than one percent with the Bank Index (KBE 23.32 +0.33) logging an even stronger gain. The Finance Sector ETF (XLF 14.91 +0.15) gained just over one percent. Long term bonds (TLT 95.65 -1.33) was rocked by a loss of -1.4%. This left it below its 20-DMA and just above the 50- and 200-DMAs (at around $95.25). NYSE trading volume was light with 834M shares traded. NASDAQ share volume was also light with 1.676B shares traded.

There were four economic reports of interest released:

• Personal Income (May) rose +0.3% as expected
• Personal Spending (May) came in flat versus an expected +0.1% rise
• PCE Prices - Core (May) rose +0.3% versus an expected +0.2% rise

All reports were released an hour before the open. Personal Income and Spending for April were revised down from +0.4% to +0.3%.

The U.S. dollar shed a half of one percent on a rise for the Euro. The rise in the Euro comes amid growing optimism that Greece's parliament will achieve a yes vote to adopt the austerity measures necessary to meet requirements for an IMF/ECB bailout package.

The yield for the 10-year note rose six basis points to close at 2.93. The price of the near term futures contract for a barrel of oil fell fifty-five cents to close at $90.61.

Implied volatility for the S&P-500 (VIX 20.56 -0.54) fell more than two percent and the implied volatility for the NASDAQ-100 (VXN 21.96 -0.62) fell about three percent. This left the VIX and the VXN closing just below their 400-Day Moving Average (DMA).

Tech (+1.4%), Consumer Discretionary (+1.2%), Financials (+1.1%), and Telecom (+1.1%) all posted gains of over one percent. Materials (+0.2%) was the laggard as all ten economic sectors in the S&P-500 moved higher on the day.

Market internals were positive with advancers leading decliners 2:1 on both the NYSE and the NASDAQ. Up volume led down volume 3:1 on both the NYSE and the NASDAQ. The index put/call ratio fell -0.37 to close at 1.03. The equity put/call ratio fell -0.07 to close at 0.63.

Commentary:

Monday saw the market open relatively flat with a quick dip into negative territory before the bulls took over. While the advance was broad with all ten economic sectors involved, volume dropped off significantly from Friday's market action saw significant losses recorded. Market participant continue to fret over slowing economic growth and potential European sovereign debt contagion. It appears that the largest economic powers in Europe (France and Germany) are prepared to do what it takes to ensure that Greece has support and that Greece's parliament will pass the austerity measures so the near term crisis may be eclipsed.

We are now in the final week of the quarter which ends on Thursday. Quarter end usually sees window dressing activity which makes it a seasonally strong time. We will wait to see if the bulls can wrest control from the bears or whether the bears can break the support of the bulls in the near future. It is also possible we will remain moribund in this fairly tight trading range. We give the edge to the bulls as the Dow, S&P-500, and NASDAQ-100 have all been able to put in closes above their respective 200-DMAs. With that said, the Semiconductors need to join them and the Russell-2000 in a higher volume push higher for us to declare victory for the bulls. Financials were key to the rally which saw Bank of America (BAC 10.85 +0.33) add just over three percent on the day. Since Bank of America and the Finance Sector ETF (XLF) show some of the highest interest of U.S. exchange traded securities, a potential short covering rally could see pressure come off of the financials.

Finally, we have been keeping our eyes on implied volatility and longer term bond prices. With the VIX and VXN closing back below their 400-DMAs, the stage is set for implied volatility to confirm a top, but we aren't there yet. The 20+ year bond ETF (TLT) made a significant move lower which puts it within striking distance of breaking below its 200-DMA. Such a move would be helpful to equities as some of the capital fleeing bonds could find its way into equities.

The market still lacks a definitive directional bias as it remains caught in a tight trading range. Sentiment has been gloomy enough that a break higher is possible. We will maintain our long positions while waiting to see if the bulls or bears can seize an advantage.

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