7/25/2011 9:07:12 AM

Financials Down, Tech Up and Wall of Worry looms ahead...

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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

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Value Portfolio:
We are long TBT at $32.50 from June 16th. (TBT closed at $32.73 on July 22nd)
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 $96.05 on July 22nd so the contracts we sold are about two 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 either side of flat and then moved in different diretions for the first fifteen minutes. The NASDAQ-100 soared while the Dow and S&P-500 moved lower. All three moved lower together for the remainder of the remainder of the first hour of trading. All three then moved higher for the rest of the morning session with the Dow and S&P-500 peaking early in the noon hour while the NASDAQ-100 continued to add to gains through the afternoon. Much of the final hour saw weakness with buying in the final fifteen minutes ensuring a close with gains for the S&P-500 and NASDAQ-100 and only a modest loss for the Dow. This left all three in Uptrend states with a BULLISH BIAS. The Semiconductor Index (SOX 408.56 +9.68) posted a better than two percent gain closing back above its 20-Day Moving Average (DMA) for the first time since July 11th. The Russell-2000 (IWM 84.05 +0.11) also managed to close higher. With all three leading indexes moving higher, but with the Finance sector moving lower, we have a mixed bag. The Regional Bank Index (KRE 25.66 -0.15) posted a fractional loss as did the Bank Index (KBE 23.77 -0.08). The Finance Sector ETF (XLF 15.32 -0.04) eased modestly. Long term bonds (TLT 96.05 +0.72) added a fractional gain. TLT is now above all three moving averages we regularly report on. The BIAS of longer term bonds is BULLISH and it remains in a trading state. NYSE trading volume was light with 732M shares traded. NASDAQ share volume was light with 1.450B shares traded.

There were no economic reports of interest released. Instead, market participants fretted over the lack of a deal to raised the U.S. debt ceiling. Most of the worries didn't fully manifest themselves until after the close when President Obama criticized Republican leadership while Rebublican leadership stated that they would work with House and Senate colleagues rather than the Obama administration to get a deal done.

The U.S. dollar closed unchanged.

The yield for the 10-year note fell five basis points to close at 2.96. The price of the near term futures contract for a barrel of oil rose seventy-four cents to close at $99.87.

Implied volatility for the S&P-500 (VIX 17.52 -0.04) closed nearly unchanged while the implied volatility for the NASDAQ-100 (VXN 19.17 -0.54) shed nearly three percent. This left both the VIX and VXN the support of their 200-DMAs. We think that in the very short term, implied volatility could spike but then will revert to a continued move lower.

Tech (+1.2%), Energy (+0.5%), and Consumer Discretionary (+0.4%) moved higher while the other seven economic sectors in the S&P-500 moved lower lower led by Utilities (-1.0%).

Market internals were mixed with decliners leading advancers by narrow margins on both the NYSE and the NASDAQ. Down volume led up volume by a narrow margin on the NYSE while Up volume led down volume 3:1 on the NASDAQ. The index put/call ratio rose 0.14 to close at 1.10. The equity put/call ratio rose +0.05 to close at 0.62.

Friday was a day where the leading indexes got out in front and led the way higher while the Dow posted a modest loss and the S&P-500 posted a modest gain. The market may yet climb a wall of worry but, in the very short term, looks to have reached a local high. With all three of the major indexes in nascent and weak uptrend states, the bulls have an advantage. We need to contrast this with the fragility of a move higher that is unlikely to be able to be sustained without clarity over reaching a deal to raise the debt ceiling.

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

With the first obstacle now taking a step backward, we believe that the major indexes will have to put the brakes on here for some of the coming week. Friday, Caterpillar (CAT 105.15 -6.45) reported earnings and guidance disappointed market participants sending the Dow downward.

With financials again moving lower, we will likely be at a point where we have to be careful about shorting a dull market but where upward progress will be very difficult. On Friday, the NASDAQ-100 pushed to new highs for the year, but that won't be sufficient to have the markets charge ahead as long as uncertainty over the debt ceiling continues and financials continue to struggle. We think we will have an immediate reaction to sell off but that reaction will likely be overdone in the early part of Monday's session and we must await the close to see where the markets are likely to trade later in the week. With the Dow off this year's high by only about one percent and the S&P-500 off its high this year by only around two percent, the challenge yet awaits but will likely be put off in the early part of the coming week.

Commentary:

Friday was a day where the leading indexes got out in front and led the way higher while the Dow posted a modest loss and the S&P-500 posted a modest gain. The market may yet climb a wall of worry but, in the very short term, looks to have reached a local high. With all three of the major indexes in nascent and weak uptrend states, the bulls have an advantage. We need to contrast this with the fragility of a move higher that is unlikely to be able to be sustained without clarity over reaching a deal to raise the debt ceiling.

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

With the first obstacle now taking a step backward, we believe that the major indexes will have to put the brakes on here for some of the coming week. Friday, Caterpillar (CAT 105.15 -6.45) reported earnings and guidance disappointed market participants sending the Dow downward.

With financials again moving lower, we will likely be at a point where we have to be careful about shorting a dull market but where upward progress will be very difficult. On Friday, the NASDAQ-100 pushed to new highs for the year, but that won't be sufficient to have the markets charge ahead as long as uncertainty over the debt ceiling continues and financials continue to struggle. We think we will have an immediate reaction to sell off but that reaction will likely be overdone in the early part of Monday's session and we must await the close to see where the markets are likely to trade later in the week. With the Dow off this year's high by only about one percent and the S&P-500 off its high this year by only around two percent, the challenge yet awaits but will likely be put off in the early part of the coming week.

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