7/13/2011 8:58:38 AM

The bulls stepped up on speculation of QE3 but the bears won the day...

Recommendation:

It appears that the top may be in for TLT and a corresponding bottom for TBT. We will abandon our long position in TBT if TLT hits $97.81. We don't expect this to occur.

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- ETF Positions indicated as Green are Long ETF positions and those indicated as Red are short positions.

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- 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.

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Long DIA at $125.90
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Value Portfolio:
We are long TBT at $32.50 from June 16th. (TBT closed at $32.12 on July 12th)
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 $97.13 so the contracts we sold are nearly one dollar out of the money but with implied volatility still considerably lower than when we sold the options. 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 lower and then moved in opposite directions in the opening minutes with the NASDAQ-100 moving lower in the first half hour with the Dow moving first up then down in the same time frame. The S&P-500 preferred to move higher during this period supported by strong buying in financials. The major indexes were able to move higher together in the late morning but the lunch hour resulted in a sell-off that continued until about 1:30pm in anticipation of the release of the Fed minutes at 2:00pm. Buying began in earnest at 2:00pm but was over with a half hour and the bears took over driving stocks lower into the close. The Dow and NASDAQ-100 have a BULLISH BIAS while the S&P-500 remains with a NEUTRAL BIAS. All the indexes we regularly report on are in trading states. The Semiconductor Index (SOX 394.96 -11.77) lost most of three percent in an ugly bout of selling. The Russell-2000 (IWM 82.85 -0.47) posted a fractional loss but left behind a gravestone doji suggesting the end of selling. It too has a BULLISH BIAS. The Regional Bank Index (KRE 25.39 +0.27) gained more than one percent to close above all the Day Moving Averages (DMAs) we regularly report on. The Bank Index (KBE 23.29 -0.05) and the Finance Sector ETF (XLF 14.98 -0.07) posted fractional losses. Long term bonds (TLT 97.13 +0.33) added a fractional gain but appears to be topping here as it failed to break above resistance. TLT is above all moving averages we regularly report on but the BIAS of longer term bonds remains neutral and is in a trading state. NYSE trading volume increased to 924M shares traded. NASDAQ share volume increased to average with 1.957B shares traded. The increase in volume is expected during option expirations week.

In addition to the released of the Fed minutes at 2:00pm, there was a single economic reports of interest released:

• Trade Balance (May) came in at -$50.2B versus an expected -$44B

The report was released an hour before the open. The Fed released the minutes from its last meeting of the Fed Open Market Committee (FOMC). The most telling thing about the minutes was essentially that more quantitative easing is on the table if it appears the economy is at risk. In other words, if the economy expands further on its own, the Fed will stand aside but if it needs help, the Fed will once again open the liquidity spigot. This caused the bulls to do some buying.

The U.S. dollar faltered to close down ever so slightly. What was important is that it retested its high on Monday and fell back from it. That high is at horizontal resistance dating back to the April 18th high and it appears the dollar is ready to move lower now.

The yield for the 10-year note fell one basis point to close at 2.91. The price of the near term futures contract for a barrel of oil gained $2.28 to close at $97.43.

Implied volatility for the S&P-500 (VIX 19.87 +1.48) and the implied volatility for the NASDAQ-100 (VXN 21.93 +1.71) both rose eight percent. They have now both closed above their 200-Day Moving Averages (DMAs). We believe that a reduction in implied volatility is likely to occur in the short term.

Utilities (+0.5%) and Healthcare (+0.1%) moved higher while the other eight economic sectors in the S&P-500 declined led by Industrials (-1.0%) and Tech (-0.9%). The Financial Sector (-0.3%) steadied a bit from its slide of more than four percent in the prior two sessions.

Market internals were negative with decliners leading advancers 4:3 on both the NYSE and the NASDAQ. Down volume led up volume 22:1 on both the NYSE and the NASDAQ. The index put/call ratio fell -0.05 to close at 1.45. The equity put/call ratio fell -0.03 to close at 0.70.

Commentary:

Tuesday saw a lower open and a failed rally attempt. We are still looking for a move higher by equities and with a potential top having been put in the U.S. dollar and longer term bonds, we could have the makings of a rally in store. This is options expiration week and we are still looking for equity prices to hold up into the end of the week.

The European Union's third largest economy, Italy appears to be on track to adopt further austerity measures by the end of the week. This is having a calming effect from recent panic over European sovereign debt.

We remain concerned that the top may already be in. However, Fed Chairman Ben Bernanke will be on Capital Hill on Wednesday addressing Congress. We expect that there may be a focus on two things. The issue du jour is raising the deficit ceiling and the other will be on what the Fed can do to help the economy and specifically to reduce unemployment. It is likely that the outcome will be that a further round of quantitative easing is possible, even though earlier rounds haven't done much more for the economy than raise stock prices. Still, that effect will not go unnoticed by market participants so it could be "risk on" yet again.

Stay tuned as we continue to monitor developments this week.

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