9/28/2011 9:17:08 AM

Fear takes over as indexes move up another two percent and then reverse course.

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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.

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Daily Trading Action

The major index ETFs opened significantly higher and sold off at the open before beginning a saw-toothed move higher that reached its zenith around 2:00pm EDT. From there, it was a steep slide lower before a large bounce in the final five minutes allowed all the major indexes to close with gains. The NASDAQ-100 closed with a strong fractional gain while the Dow and S&P-500 were able to manage gains of a bit more than one percent. This left the NASDAQ-100 and Semiconductor Index closing above their 20-Day and 50-Day Moving Averages (DMAs) with the NASDAQ-100 challenging and falling back from its 200-DMA. The Dow and S&P-500 opened on their 20-DMAs, moved higher intraday, and settled below this indicator. The Dow Jones Transport Index (IYT 78.72 +1.23) gained more than one percent on the day. The Russell-2000 (IWM 67.80 +1.43) gained more than two percent. The semiconductor Index (SOX 366.01 +6.51) gained most of two percent. The Regional Bank Index (KRE 20.11 +0.29) gained 1.5% trading up to its 20-DMA before rolling over. The Bank Index (KBE 18.29 +0.00) opened on its 20-DMA but closed back where it closed on Monday. The Finance Sector ETF (XLF 12.26 +0.06) added a half of one percent. All equity indexes we monitor are in trading states and all have a bearish bias with the exception of the Semiconductor Index and the NASDAQ-100 which have a bullish bias. In contrast, the long term bonds (TLT 117.07 -1.82) fell -1.5% and moved into a trading state.. The BIAS of longer term bonds is BULLISH.

There were two economic reports released:

• Case-Shiller 20-city Index (Jul) fell -4.11% versus an expected -4.5% fall
• Consumer Confidence (Sep) rose modestly to 45.4 versus an expected 46.6

The Case-Shiller report was released a half hour before the open with the June report revised from -4.52% to -4.40%. The Consumer Confidence report was released a half hour after the open with the August number revised from 44.5 to 45.2.

The day was all about whether the Greek bailout would work. Central to the thesis is that the Troika will audit Greek austerity plans and they will see adequate progress such that the next tranche (the sixth one since the 2010 agreement on the bailout) will be released. The 8 Billion Euro tranche would provide sufficient funding to stave off creditors. In addition, it appears likely that private holders of Greek sovereign debt will agree to take a 50% haircut on what they are owed which should position Greece to be able to repay their obligations over time. That is the upside which helped the market to move higher intraday. There were also rumors late in the U.S. session that Germany may change the terms of the bailout. An important vote in the German lower house looms on Thursday.

The U.S. dollar slipped almost six tenths of one percent.

All ten economic sectors in the S&P-500 move higher led by Materials +2.1%, Industrials +1.6%, Energy +1.5%, Health Care +1.5%, Telecom +1.2%, and Tech +1.1%. Relative laggards were, Consumer Discretionary +0.8%, Consumer Staples +0.6%, Financials +0.4%, and Utilities +0.3%.

The yield for the 10-year note rose twelve basis points to close at 2.02. The price of the near term futures contract for a barrel of crude oil rose $1.21 to close at $84.45.

Implied volatility for the S&P-500 (VIX 37.71 -1.31) 39.02 -2.23) fell more than three percent and the implied volatility for the NASDAQ-100 (VXN 37.65 -1.59) fell four percent.

Market internals were positive with advancers leading decliners 4:1 on the NYSE and by 3:1 on the NASDAQ. Up volume led down volume 3:1 on the NYSE and by 4:1 on the NASDAQ. The index put/call ratio rose +0.10 to close at 1.61. The equity put/call ratio rose +0.03 to close at 0.62.

It should be noted that some market internals for Monday's session were not updated. Advancers led decliners 2:1 on the NYSE and by a bit less than that on the NASDAQ. Up volume led down volume by 5:1 on the NYSE and by nearly 3:1 on the NASDAQ.

Commentary:

Tuesday was all about Greece. The pins and needles situation continues with the U.S. financial sector up three percent intraday, shifting into negative territory late in the day, with buying in the final minutes leaving it to close up one half of one percent. The trading appears to be driven by nervous investors that the Greek bailout is assured versus may not happen and contagion will spread globally.

The relief rally appears to have run its course and we are now set-up for a bulls/bears clash in the trenches. The leading indexes participated heavily in leading equities higher intraday but then suffered significantly as the market sold off in the afternoon. The NASDAQ-100 and Semiconductor Index both closed above important moving averages we monitor but other indexes we regularly monitor are below all the regularly monitored moving averages. With all equity indexes now in trading states and the longer term bonds joining them in that state, it is sort of a jump-ball scenario. In other words, bulls and bears are balanced at this point and the market is highly volatile so a move will get started shortly but it is difficult to say which direction it will erupt in.

We are inclined be pessimistic but we have nothing to tip the balance in favor of the bears at this time. Accordingly, we will stay with out long positions but may look to purchase some downside protection in the near future in the form of put options.

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