7/27/2011 9:18:18 AM
Selling action dominated late day trading as uncertainty weighs on sentiment...
Recommendation:
Sell DIA to close the long position and sell DIA short to open a short position.
Sell QQQ to close the long position and sell QQQ short to open a short position.
Sell SPY to close the long position and sell SPY short to open a short position.
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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 $33.36 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 lower and moved even lower in the first half hour of trading before reversing and beginning a see-saw move higher that would last into late afternoon. With one and one half hours remaining, a sell-off began that would last into the close ensuring a close that would have been at the lows if not for a rally in the final minutes. The close left the Dow (-0.70%) and S&P-500 (-0.40%) with losses and the NASDAQ-100 (+0.25%) with a partial gain. The NASDAQ itself closed down one tenth of one percent. The Dow closed just below its 20-Day Moving Average (DMA). This left all three in trading states with a BULLISH BIAS but the Dow and S&P-500 have warned of a possibility to move to a BEARISH BIAS. The Semiconductor Index (SOX 406.47 +2.39) added a partial gain. The Russell-2000 (IWM 82.43 -0.63) took a partial loss. The Regional Bank Index (KRE 25.28 -0.28) closed below its 20- and 200-DMAs but still above its 50-DMA. The Bank Index (KBE 23.58 -0.07) and the Finance Sector ETF (XLF 15.19 -0.02) took modest losses. Long term bonds (TLT 95.65 +0.65) added a fractional gain but remains below its 50-DMA. The BIAS of longer term bonds is BULLISH and it remains in a trading state. NYSE trading volume was light. NASDAQ share volume was light with 1.700B shares traded.
There were three economic reports of interest released:
- Case-Shiller 20-City Index (May) came in at -4.51% versus an expected -4.4%
- Consumer Confidence (Jul) came in at 59.5 versus an expected 56.0
- New Home Sales (Jun) came in at 312K versus an expected 320K
The first report was released a half hour before the open while the others came out a half hour after the open.
The U.S. dollar closed down eight and one half tenths of one percent.
The yield for the 10-year note fell five basis points to close at 2.95. The price of the near term futures contract for a barrel of oil rose thirty-nine cents to close at $99.59.
Implied volatility for the S&P-500 (VIX 20.23 +0.88) rose more than four percent and the implied volatility for the NASDAQ-100 (VXN 21.58 +0.63) rose three percent. This positions both the VIX and VXN to challenge a downtrend line dating from their mid-June highs. We continue to look for a further spike and will weigh in when it appears to be complete.
Market internals were negative with decliners leading advancers 8:5 on the NYSE and by 9:5 on the NASDAQ. Down volume led up volume by most of 3:2 on the NYSE and by a narrow margin on the NASDAQ. The index put/call ratio fell -0.25 to close at 1.11. The equity put/call ratio was nearly unchanged falling -0.02 to close at 0.59.
Commentary:
Tuesday saw the semiconductors and NASDAQ-100 close higher while the other equity indexes continued to give ground. The negotiations over the U.S. debt ceiling seem even more tenuous as House Speaker John Boehner puts off a floor vote as the CBO reveals his plan won't reach the level of deficit cuts he announced and Tea Party candidates announce they may not vote for it. In addition, Senate majority leader Harry Reid has said the Senate won't pass it and Obama has threatened to veto it. Meanwhile, next Tuesday's August 2nd deadline looms ever closer. In addition, more cracks appears in the Greek debt bailout as remarks by Greece's prime minister cause Germans to take umbridge.
So, two out of the three factors we are monitoring are now negative for 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 still believe that this earnings season and guidance will provide a lift for the market. If, however, analysts take down future earnings expectations, this currently positive factor will turn into a negative at some point in the not too distant future.
At this point, investors in U.S. equities have to watch the partisan squabbling in Washington over an imminent raising of the debt ceiling. We believe that more and more risk will be taken off in the short term. This means that equities will sell off in the short term and we don't believe we will have resolution over the debt crisis this week.
We are now going to adopt the stance that we should have probably adopted earlier in the week and that is to position for a move lower into the end of the week. With implied volatility looking like it will break higher still, we are willing to take a risk to position short. The Dow must move higher today or it will break an important support level and should accelerate to the downside with the S&P-500 following on its coat tails. With only the NASDAQ-100 and Semiconductors managing a one day move higher, we think that the weight of uncertainty will bring the market lower. We are probably one day early on this move, in that we can't be certain the market will continue to slide here.
We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.
