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Another High on Increased Volume...

7/22/2011 8:51:35 AM

Earnings continue to impress as optimism returns...

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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

Click here to learn more about my services and for our ETF Trend Trading.

Value Portfolio:
We are long TBT at $32.50 from June 16th. (TBT closed at $33.20 on July 21st)
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 $95.33 on July 21st so the contracts we sold are most of three dollars out of the money. 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 immediately began to sell-off and the NASDAQ-100 moved into negative territory. That selling reversed itself in the first ten minutes with the Dow and S&P-500 never leaving positive territory. The move higher was on heavier volume taking a break one hour into the session. The shift to moving lower lasted late into the morning before the major indexes began to drift sideways. In the latter half of the lunch hour, the major indexes were once again driven higher by more confident bulls. That move higher was on heavy volume but exhausted itself before the end of the lunch hour. The rest of the afternoon was spent either drifting slowly lower or moving mostly sideways with the Dow and S&P-500 finishing up more than one percent and shifting to uptrend states. The NASDAQ-100 posted a fractional gain after testing up near this years intraday highs. All three have a BULLISH BIAS. The Semiconductor Index (SOX 398.88 +3.77) posted a fractional gain. The Russell-2000 (IWM 83.94 +0.76) rose most of one percent but remains in a trading state. The Regional Bank Index (KRE 25.81 +0.45) posted a gain of most of two percent. The Bank Index (KBE 23.85 +0.56) gained more than two percent as did the Finance Sector ETF (XLF 15.36 +0.36). Long term bonds (TLT 95.33 -0.74) lost most of one percent. TLT is now below the 20-DMA and the 50-DMA but remains above the 200-DMA. The BIAS of longer term bonds is currently NEUTRAL and is in a trading state. NYSE trading volume was below average with 969M shares traded. NASDAQ share volume was above average with 2.130B shares traded.

There were five economic reports of interest released:

  • Initial Jobless Claims for last week came in at 418K versus an expected 411K
  • Continuing Jobless Claims came in at 3.698M versus an expected 3.700M
  • Philadelphia Fed Index (Jul) rose 3.2 versus an expected flat (+0.0) reading
  • Leading Economic Indicators (Jun) rose +0.3% as expected
  • FHFA Housing Price Index (May) rose +0.4% versus April's +0.8% reading

The first two reports were released an hour before the open. The other three reports were released an hour into the session. Initial Jobless Claims for the prior week were revised higher from 405K to 408K. May's Leading Economic Indicators was revised down from +0.8% to +0.2%.

The U.S. dollar fell about one percent on the day as investor fears about European sovereign debt faded (for now) and the Euro made strong gains for the third day in a row. A plan has been drafted on a bailout for Greece. The day after France, Germany, the European Union, and the ECB had agreed on the basis of a plan to have a bank levy ensure participation of private Greek bond holders, that idea was rejected due to the difficulty to implement such a levy. The governments in the European union will instead provide the necessary funding.

The yield for the 10-year note rose eight basis points to close at 3.01. The price of the near term futures contract for a barrel of oil rose seventy-three cents to close at $99.13.

Implied volatility for the S&P-500 (VIX 17.56 -1.53) fell six percent and the implied volatility for the NASDAQ-100 (VXN 19.71 -1.35) eight percent. This left the VIX below the support of its 200-DMA and the VXN on that important level. We continue to believe that a reduction in implied volatility is likely to occur in the short term and there is a reasonable probability that we just saw the local closing high for implied volatility on Monday.

All ten economic sectors in the S&P-500 moved higher with Financials (+2.5%), and Energy (+2.0%) leading the way higher. Only Consumer Staples (+0.7%), Tech (+0.5%), and Telecom (+0.5%) posted gains of less than one percent.

Market internals were positive with advancers leading decliners nearly 4:1 on the NYSE and by 2:1 on the NASDAQ. Up volume led down volume 4:1 on the NYSE and by 7:3 on the NASDAQ. The index put/call ratio fell -0.03 to close at 0.96. The equity put/call ratio fell -0.05 to close at 0.57.


Thursday started with strengthening confidence that the Greek bailout would go through which had futures higher and the dollar lower versus the Euro. Market participants essentially ignored the slightly worse than expected jobless claims numbers and instead embraced the better than expected Philly Fed number. By the middle of the lunch hour a rumor that a deal to raise the debt ceiling had been done caused a spike of heavy buying before the rumor was refuted on CNBC by the Press Secretary.

We are still watching the following three as factors in moving the market:

  • U.S. Debt Ceiling negotiations to avoid a reduction to the U.S. AAA credit rating
  • European sovereign debt stability and bailouts
  • Q2 Earnings season where some 300 companies are set to report in the coming week

Things have improved in all three areas but none of them are yet complete. The Q2 Earnings have come in higher than expected with more than the average number of companies beating their earnings estimates but we are still early in earnings season.

At this point, we have been getting what we have been looking for as the markets will likely continue to move higher to retest the May 2nd highs. It isn't clear how long the process will take but with the latest strong moves it appears it will happen sooner rather than later. The biggest factor in this move higher is that financials led the rally higher. Without financials holding the Dow and S&P-500 back, it is possible that the Dow and S&P-500 could attempt to challenge their local highs as early as Friday as they are only a fraction of one percent away. Breaking through those highs is another matter, however and we aren't certain that will occur on Friday. For now, we remain long.

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


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