7/15/2011 8:49:30 AM
Fed Chairman Bernanke denies immediate action and market reverses gains...
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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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Value Portfolio:
We are long TBT at $32.50 from June 16th. (TBT closed at $32.80 on July 13th)
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 $96.01on July 13th so the contracts we sold are about two dollars 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 higher and moved higher for the first hour of trading. Equities then reversed course and began a dive lower that found a bottom shortly before 1:30pm but retested that level again going into the close. The Semiconductor Index (SOX 387.76 -6.11) was rocked with a 1.5% loss and retested its intraday low from June 20th. The Russell-2000 (IWM 82.26 -1.33) also posted a loss of just over 1.5%. Like the three major indexes, it has a BULLISH BIAS. The Regional Bank Index (KRE 25.11 -0.50) was rocked for a two percent loss and closed back below the 20-, 50-, and 200-Day Moving Averages (DMAs). It has a BULLISH BIAS. The Bank Index (KBE 23.08 -0.27) logged a loss of a bit more than one percent and the Finance Sector ETF (XLF 14.88 -0.11) posted a large fractional loss. Long term bonds (TLT 96.01 -1.39) took a sizeable loss and appears to have confirmed a top is in. TLT is above all moving averages we regularly report on but the BIAS of longer term bonds is BEARISH and is in a trading state. NYSE trading volume was below average with 925M shares traded. NASDAQ share volume was below average with 1.770B shares traded.
There were seven economic reports of interest released:
- Initial Jobless Claims for last week came in at 405K versus an expected 410K
- Continuing Jobless Claims came in at 3.727M versus an expected 3.700M
- Retail Sales (Jun) rose +0.1% versus an expected -0.2% fall
- Retail Sales excluding automobiles (Jun) were flat (+0.0%) as expected
- PPI (Jun) fell -0.4% versus an expected -0.2% fall
- Core PPI (Jun) rose +0.3% versus an expected +0.2% rise
- Business Inventories (May) rose +1.0% versus an expected +0.9% rise
With the exception of the Treasury Budget which was released at 2:00pm, the reports were released an hour or more before the open.
The important events that occurred on Wednesday included China's GDP report of +9.5% growth which was higher than expected. That allowed U.S. markets to open higher. The dollar also fell as the Euro strengthened due to Italy's likely adoption of stronger austerity measures by Friday.
The big mover of equities was the second day of semi-annual monetary policy testimony Fed Chairman provides to Congress. This time it was in front of the Senate Banking Committee. Fed Chairman Ben Bernanke confirmed that the Fed hasn't completed a plan for a third round of quantitative easing (QE3) and wasn't prepared to act immediately. This provided a catalyst for bears to sell off the market.
It should be noted that the NASDAQ-100 bore the worst losses as Google (GOOG 528.94 -9.32) slid in advance of its earnings report after the bell. GOOG reported after the close and had a significant earnings beat driving the stock price up to nearly $600.00 after hours, a gain of most of twelve percent. This will improve sentiment and raise futures for the NASDAQ-100 index in particular.
The U.S. dollar was unchanged after opening lower.
The yield for the 10-year note rose four basis points to close at 2.94. The price of the near term futures contract for a barrel of oil fell -$2.36 to close at $95.69.
Implied volatility for the S&P-500 (VIX 20.80 +0.89) rose 4.5% and the implied volatility for the NASDAQ-100 (VXN 21.87 +0.05) was nearly unchanged. We continue to believe that a reduction in implied volatility is likely to occur in the short term.
Tech (-1.0%), Industrials (-1.0%) and Materials (-0.9%) led the way lower as all ten economic sectors in the S&P-500 finished with losses.
Market internals were negative with decliners leading advancers nearly 7:2 on both the NYSE and the NASDAQ. Down volume led up volume by more than 3:1 on the NYSE and by 4:1 on the NASDAQ. The index put/call ratio fell -0.11 to close at 1.34. The equity put/call ratio fell -0.04 to close at 0.66.
Commentary:
Thursday was a disappointing day for the bulls as bearish sentiment continues to grow. The boost stocks received when Bernanke confirmed the Fed would consider further quantitative easing was reversed when Bernanke confirmed the Fed wasn't prepared to act immediately. Friday will see the expiration of July options and we have been expecting prices to hold up into the end of the week.
We remain concerned that the top for equities may already be in. With that said, with the rather signficant amount of bearishness out there, we will wait to see how Friday's trading action looks. After June's options expiration, the following Monday equities moved off of significantly oversold conditions to begin a significant move higher. Seasonality argues against such a move next week but the major indexes and the Russell-2000 have a BULLISH BIAS and the semiconductor index is showing a potential double bottom. Even the Regional Bank Index has a BULLISH BIAS after having been tagged with a two percent loss on Thursday. There is a lot of energy built up for a large move one way or the other and we still believe that can be a move higher for equities.
It appears that the top is confirmed for TLT and a corresponding bottom for TBT. It should be noted that a huge price spike (aberrant trade) went off at $97.90. That spike occurred at 13:01 and then subsided. The highest intraday trade outside of that anomaly was $97.10 and we are maintaining our position in TBT. TLT should open below $96.00 on Friday after closing at $96.01 on Thursday.
We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.
