7/11/2011 7:30:48 AM

Futures reverse sharply on poor economic reports...

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Value Portfolio:
We are long TBT at $32.50 from June 16th. (TBT closed at $33.38 on July 8th)
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 $95.37 so the contracts we sold are nearly three 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 lower and then moved higher at the open in a move that would reverse itself in the first half hour of trading. The major indexes moved lower in tandem into late morning and were all down more than one percent but less than two percent when the bulls, sensing that the bears didn't really have the desire to drive things lower, took control and moved the major indexes higher in a see-saw fashion during the rest of the session. The final forty minutes saw more aggressive buying by the bulls which left losses at around one half of one percent for the Dow, about two thirds on one percent for the S&P-500, and less than one third on one percent for the NASDAQ-100. The Dow ,S&P-500, and NASDAQ-100 now have a NEUTRAL BIAS. The Semiconductor Index (SOX 413.80 -6.60) lost one and one half percent after gaining more than two percent on Thursday. This left it closing just under its 200-Day Moving Average (DMA). The Russell-2000 (IWM 85.13 -0.52) took a fractional loss but looks the strongest of all the equity indexes we regularly report on. The Regional Bank Index (KRE 25.72 -0.42) lost more than on and one half of one percent but remains in an uptrend state. The Bank Index (KBE 24.03 -0.37) lost most of its gain from Thursday as did the Finance Sector ETF (XLF 15.46 -0.20). 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 95.37 +1.33) added more than one percent on fears over a wobbly economy. The BIAS of longer term bonds remains neutral. TLT is in a downtrend state. NYSE trading volume was quite light with 756M shares traded. NASDAQ share volume was quite light with 1.566B shares traded.

There were seven economic reports of interest released:

• Nonfarm Payrolls (Jun) came in at +18K versus an expected +80K
• Nonfarm Private Payrolls (Jun) came in at +57K versus an expected +110K
• The Unemployment Rate (Jun) rose to 9.2% versus an expected 9.1%
• Average Workweek (Jun) came in at 34.3 versus an expected 334.4
• Hourly Earnings (Jun) were flat versus an expected +0.2% rise
• Wholesale Inventories (May) roes +1.8% versus an expected +0.9% rise
• Consumer Credit (May) came in at +$5.1B versus an expected +$3.5B

The first five reports were released an hour before the open. Inventories came out a half hour after the open and Consumer Credit was released with one hour remaining in the session.

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

The yield for the 10-year note fell thirteen basis points to close at 3.02. The price of the near term futures contract for a barrel of oil lost -$2.51 to close at $96.20.

Implied volatility for the S&P-500 (VIX 15.95 +0.00) closed unchanged after gapping way up at the open. The implied volatility for the NASDAQ-100 (VXN 17.45 -0.26) fell more than one percent after gapping up significantly higher at the open.

All ten economic sectors in the S&P-500 declined led by the Financial Sector Energy (-1.3%) which gave up most of Thursday's gains. Consumer Staples (-0.3%), Healthcare (-0.4%), and Utilities (-0.4%) took the least losses as they are considered "safer" than the other sectors.

Market internals were negative with decliners leading advancers 2:1 on both the NYSE and the NASDAQ. Down volume led up volume 4:1 on the NYSE and by 2:1 on the NASDAQ. The index put/call ratio rose +0.39 to close at 1.49. The equity put/call ratio rose +0.02 to close at 0.58.

Commentary:

Friday saw a significant lower open and the sell-off saw the major indexes move more than one percent but less than two percent lower. The rebound following that panic selling was significant. In fact, implied volatility for the S&P-500, after opening significantly higher, closed unchanged. Implied volatility for the NASDAQ-100 closed lower by more than one percent. This is highly unusual when the major indexes closed lower. Option writers are willing to take less premiums in order to write contracts which means that the market makers believe that volatility is going to move lower suggesting that they intend to hold prices up into the end of next week when July options expire.

All of this was in response to poor economic reports showing job growth was much weaker than expected and that the official unemployment rate rose to 9.2%. This deflated some bullish optimism at the open but that optimism recovered when the bears failed to really press their advantage.

The largest concern is over the longer term bonds as investors bought them heavily driving the price up more than one percent on the day. With interest rates so low, this suggests that the "risk on" trade may be failing. With that said, the NASDAQ-100 and Russell-2000 showed relative strength but the semiconductor index continues to underperform.

We were looking for longer term bond prices to stay below their 200-DMA. However, the opening price was at the level of the 200-DMA and only moved higher through the session. The dollar opened significantly higher but then fell back through the session closing only mildly higher. A further move higher by the dollar will make an advance by equities difficult.

We had predicted a pause was required and finally received that. It is unlikely that the pause is over in a single session and a further pullback is still needed on Monday before a potential "turnaround Tuesday" could see the market advance once again. Alcoa (AA) kicks off earnings season when they report earnings after the close on Monday. Perhaps that will be a catalyst for a move higher during earnings season.

We have been looking for a challenge of the May 2nd highs and only received that for the NASDAQ-100 with the S&P-500 and Dow not yet close. We still believe in the potential for such a move and with the major indexes now showing a NEUTRAL BIAS, we want to give the bulls the benefit of the doubt that they can get the job done. 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.