7/8/2011 9:03:29 AM

The bulls ran over the bears but may have overstepped...

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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.

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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 $34.31 on July 7th)
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 $94.04 so the contracts we sold are nearly four dollars out of the money with price potentially reversing lower later in the week. 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 price stays below $98.00, let them expire worthless and keep all the money).

Daily Trading Action

The major index ETFs opened significantly higher and then the bears tried to get control and continued to contest things in the early goings. After 20-40 minutes, the bulls pushed back the bear attack which had never made much headway, and began to move the major indexes higher in a see-saw fashion. The major indexes continued this move topping around 2:30pm before easing late in the day to close off their highs but all with respectable gains of eight tenths of one percent to more than one percent. The NASDAQ-100 threatened to break above the May 2nd highs and, in fact, did so by a hair. This forms a potential double top for the NASDAQ-100 but the index also moved into an uptrend state joining the Dow and Russell-2000. The Semiconductor Index (SOX 420.40 +8.61) gained more than two percent as it moved decisively back above its 200-Day Moving Average (DMA) closing just below its 50-DMA after penetrating it intraday. The Russell-2000 (IWM 85.65 +1.27) gained one and one half of one percent. The Regional Bank Index (KRE 26.14 +0.39) gained one and one half of one percent and moved into an uptrend state. The Bank Index (KBE 24.40 +0.40) gained one and two thirds of one percent as did the Finance Sector ETF (XLF 15.66 +0.25). Both remain in trading states as does the S&P-500 and the Semiconductor Index. The other equity indexes are all in uptrend states. Both the Russell-2000 and the Regional Bank Index now have a BULLISH BIAS. Long term bonds (TLT 94.04 -0.28) gave up a fractional loss as the BIAS of longer term bonds went to neutral on its way to a BEARISH BIAS. TLT is in a downtrend state. NYSE trading volume was light with 848M shares traded. NASDAQ share volume was nearly average with 1.836B shares traded.

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

• ADP Employment Change (Jun) showed an increase of 157K jobs versus an expected 60K
• Initial Jobless Claims for last week fell to 418K versus an expected 425K
• Continuing Jobless Claims came in at 3.681M versus an expected 3.700M

All three reports were released an hour or and hour and fifteen minutes before the open. The jobless claims numbers for the prior week were adjusted to be even higher than reported so the improved numbers for the past week were even more appreciated by market bulls.

The U.S. dollar fell two tenths of one percent.

The yield for the 10-year note rose five basis points to close at 3.15. The price of the near term futures contract for a barrel of oil gained $2.06 to close at $98.71. The U.S. government weekly crude oil inventory report showed a draw down of 889K barrels.

Implied volatility for the S&P-500 (VIX 15.95 -0.39) fell more than two percent while the implied volatility for the NASDAQ-100 (VXN 17.71 -0.14) fell fractionally. Both had opened significantly lower but rose steadily through the day. It isn't normal for implied volatility to continue rising with the major indexes moving higher and we would expect this to be resolved shortly.

The Financial Sector Energy (+1.6%) led the way higher as eight out of ten economic sectors in the S&P-500 moved higher. The Telecom sector was neutral and Healthcare (-0.1%) was the only losing sector.

Market internals were positive with advancers leading decliners better than 3:1 on both the NYSE and the NASDAQ. Up volume led down volume 4:1 on the NYSE and by nearly 6:1 on the NASDAQ. The index put/call ratio fell -0.33 to close at 1.10. The equity put/call ratio fell -0.15 to close at 0.56.

Commentary:

Thursday saw a break out higher following the pre-market rise in future following the better than expected employment picture. Friday before the open, the government will release the non-farm payroll numbers and market participants are expecting a beat over the consensus estimate by economists. A failure to beat these expectations would likely cause equities to pull back.

The "risk on" trade was in evidence but the big difference for the market was the continued improvement of the financial sector. Finance related indexes are still lagging the broader market but are now positioned where they could move from acting as a net drag to perhaps helping the market to move higher.

We are looking for longer term bond prices to stay below their 200-DMA. Any significant move above that level would signal that the "risk on" has fallen out of favor. If that holds, the equities can continue to press higher. The other factor is the strength or weakness of the U.S. dollar.

The advance we were looking for late in the week has, thus far, taken place. It is likely that the major indexes now need to take a pause that refreshes to build energy for the S&P-500 to finally assault its May 2nd highs. The NASDAQ-100 will likely follow-up on its potential double-top formation (for now) and move lower in the short term. With the overbought nature of equities at this time, this is probably necessary.

We will remain long until we see what sort of a pull-back we get for the major indexes.

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