7/26/2011 9:03:46 AM

Market participants frown upon stocks while waiting for certainty of a U.S. Debt Ceiling Deal...

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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 $33.36 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 $95.00 on July 22nd so the contracts we sold are 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 most of one percent lower and then moved in mixed fashion in the opening minutes before finding a bottom within the first fifteen minutes of trading. The move higher was in see-saw fashion through the morning and the lunch hour. The NASDAQ-100 was able to achieve a new intraday high for the year. After that, the major indexes began a gradual move in a see-saw fashion downward that saw the major indexes close lower than the Friday close but above their lower open on Monday. This left all three in trading states with a BULLISH BIAS. The Semiconductor Index (SOX 403.08 -5.48) lost most than one percent but managed to close above its 20-Day Moving Average (DMA). The Russell-2000 (IWM 83.06 -0.99) also lost more than one percent and closed below its 20-DMA. With all three leading indexes moving lower, market participants will be on their toes. The Regional Bank Index (KRE 25.56 -0.10) opened on its 200-DMA and then moved higher closing with a fractional loss but above all the moving averages we regularly report on. The Bank Index (KBE 23.65 -0.12) and the Finance Sector ETF (XLF 15.21 -0.11) both posted fractional losses. Long term bonds (TLT 95.00 -1.05) posed a loss of more than one percent but remains above its 200-DMA. TLT is below the 20- and 50-DMAs. The BIAS of longer term bonds is BULLISH and it remains in a trading state. NYSE trading volume was light with 764M shares traded. NASDAQ share volume was light with 1.500B shares traded.

There were no economic reports of interest released. Instead, market participants focused on the rhetoric coming from President Obama, Senate Majority Leader Harry Reid, and House Speaker John Boehner. Since there is uncertainty over the debt ceiling getting raised, the market opened lower but recovered somewhat from that. That was in the face of Moody's downgrading Greek debt to one notch above default. By some measures, there is virtually a 100% certainty of some sort of Greek debt default. That didn't derail U.S. markets either.

The U.S. dollar closed down a tenth of one percent.

The yield for the 10-year note rose four basis points to close at 3.00. The price of the near term futures contract for a barrel of oil fell sixty-seven cents to close at $99.20.

Implied volatility for the S&P-500 (VIX 19.35 +1.83) rose ten percent and the implied volatility for the NASDAQ-100 (VXN 20.95 +1.78) rose nine percent. This left both the VIX and VXN above the support of their 200-DMAs. As we predicted, implied volatility spiked but we believe it will fall back again shortly.

Tech, Industrials, and Utilities were relatively strong while Telecom, Healthcare, and Consumer Staples were weak.

Market internals were negative with decliners leading advancers 11:3 on the NYSE and by 10:3 on the NASDAQ. Down volume led up volume 3:1 on the NYSE and by 5:2 on the NASDAQ. The index put/call ratio rose 0.26 to close at 1.36. The equity put/call ratio was nearly unchanged falling -0.01 to close at 0.61.

Monday saw both continued optimism (the NASDAQ-100 reached a new intraday high for the year) and some pessimism with all the equity indexes we regularly monitor closing lower. U.S. equities are likely to be held hostage until a debt deal gets done, which has a high profile target of August 2nd. We continue to 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

We now have uncertainty over the U.S. debt ceiling being the primary negative weighing on U.S. equities. A large number of companies are reporting better than expected top and bottom line growth. In fact, the percentage of earnings beats ranks among the highest in the last ten years. Although Greek debt was again downgraded, the bailout package is intact.

At this point, investors in U.S. equities have to watch the partisan squabbling in Washington over an imminent raising of the debt ceiling. Why our politicians allow themselves to be wrapped in party rhetoric rather than do their jobs is a subject for a more lengthy missive than we have space for here. At this time, we will remain long as we wait for the lack of progress on this issue that will likely keep equity prices in check.

Commentary:

Monday saw both continued optimism (the NASDAQ-100 reached a new intraday high for the year) and some pessimism with all the equity indexes we regularly monitor closing lower. U.S. equities are likely to be held hostage until a debt deal gets done, which has a high profile target of August 2nd. We continue to 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

We now have uncertainty over the U.S. debt ceiling being the primary negative weighing on U.S. equities. A large number of companies are reporting better than expected top and bottom line growth. In fact, the percentage of earnings beats ranks among the highest in the last ten years. Although Greek debt was again downgraded, the bailout package is intact.

At this point, investors in U.S. equities have to watch the partisan squabbling in Washington over an imminent raising of the debt ceiling. Why our politicians allow themselves to be wrapped in party rhetoric rather than do their jobs is a subject for a more lengthy missive than we have space for here. At this time, we will remain long as we wait for the lack of progress on this issue that will likely keep equity prices in check.

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