7/29/2011 8:49:36 AM

The markets run about one percent higher before reversing and achieving a mixed close...

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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):
Short DIA at $124.37
Short SPY at $132.59
Short at $59.24

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 $32.74 on July 28th)
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 $96.02 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 flat and moved higher in the morning (one percent and more for the higher beta equity indexes) before rolling over around noon to begin a slide that would last all afternoon. This left the Dow and S&P-500 below their 20- and 50-Day Moving Averages (DMAs) and in downtrend states. The NASDAQ-100 was able to log a modest gain and remains in a trading state still above its 50-DMA. While all three have a BULLISH BIAS at present, all three have warned of a possibility to move to a BEARISH BIAS. The Semiconductor Index (SOX 390.53 -2.60) logged a fractional loss. The Russell-2000 (IWM 79.84 -0.13). The Regional Bank Index (KRE 24.68 -0.07) and the Bank Index (KBE 23.00 -0.02) closed down modestly while the Finance Sector ETF (XLF 14.84 +0.01) closed all but flat. Long term bonds (TLT 96.02 +0.36) closed higher as investors have been fleeing to the relative safety of U.S. bonds. The BIAS of longer term bonds is BULLISH but TLT has warned of a potential move to a BEARISH BIAS. It remains in a trading state. NYSE trading volume was a bit light with 987M shares traded. NASDAQ share volume was average with 2.090B shares traded.

There were three economic reports of interest released:

• Initial Jobless Claims for last week came in at 398K versus an expected 415K
• Continuing Jobless Claims came in at 3.703M versus an expected 3.688M
• Pending Home Sales (Jun) rose +2.4% versus an expected decline of -3.0%

The unemployment picture was less pessimistic than expected, although the prior week's initial jobs number was raised from 418K to 422K and the continuing claims for last week was raised from 3.698M to 3.720M. Bother reports were released an hour before the open while the Pending Home Sales report was released a half hour after the open.

The U.S. dollar rose two tenths of one percent.

The yield for the 10-year note fell three basis points to close at 2.95. The price of the near term futures contract for a barrel of oil was nearly unchanged rising four cents to close at $97.44.

Implied volatility for the S&P-500 (VIX 23.74 +0.76) rose three and one third of one percent and the implied volatility for the NASDAQ-100 (VXN 25.12 +0.42) rose nearly two percent. This is the highest closing value since mid-March of this year. We now must watch for a potential top here.

Market internals were negative with decliners leading advancers 5:3 on the NYSE and by a modest two percent on the NASDAQ. Down volume led up volume by nearly 2:1 on the NYSE and by 5:4 on the NASDAQ. The index put/call ratio fell 0.42 to close at 1.11. The equity put/call ratio rose 0.03 to close at 0.70.

Commentary:

Thursday saw a large intraday move higher reverse itself with the Dow and S&P-500 logging losses while the NASDAQ-100 managed a modest gain. None have yet reached their 200-DMAs which lie a relatively small amount below current price levels.

We continue to monitor three factors that will affect U.S. equity markets:

• 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

The House failed to vote on Thursday and when delays were announced this helped the market to roll over at noon. Senate majority leader Harry Reid says he won't allow it to pass and the President has threatened a veto and the deadline is August 2nd. Investors appear more nervous about a potential default which requires legislation to be passed by both houses and the President's signature by Tuesday.

We believe the larger problem continues to be the European Union having to prop up insolvent countries debt with funds from stronger economies, namely Germany and France. The latest is a warning of another potential downgrade of Spain's sovereign debt.

Two out of three of the points we are watching continue to disappoint while the earnings and guidance continues to beat expectations by a larger amount than is historically expected. We remain concerned, however, that analysts will begin to pare back earnings expectations as the economy threatens to dip into another recession. That would mean that all three factors we are monitoring would be negative which would surely tank U.S. equities markets. We will remain short equities for now.

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