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Take a Deep Breath...

9/29/2011 8:58:47 AM

Risk off in anticipation of Euro bailout vote in Germany.

Take no action.

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Stock Market Trends:

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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Value Portfolio:

Daily Trading Action

The major index ETFs opened higher and after a quick head fake, moved higher reaching its zenith less than one half hour later with the Dow and NASDAQ-100 up more than one percent and the S&P-500 up more than eight tenths of one percent. The slide then began with a continuous move to the downside only interrupted by a rally attempt from 2:00pm which broke shortly after 3:00pm EDT. The effect was chilling as the major indexes moved down the remainder of the session to close just off their lows. Major index losses were from -1.5% to -2.0%. This left all equity indexes we monitor below all three of the moving averages we regularly report on. The Dow Jones Transport Index (IYT 76.45 -2.27) fell -2.9%. The Russell-2000 (IWM 65.20 -2.60) fell an astonishing -3.8% trading not far off of its 52-week low. The semiconductor Index (SOX 355.36 -10.75) fell -2.9%. The Regional Bank Index (KRE 19.15 -0.96) fell -4.8%. The Bank Index (KBE 17.65 -0.64) fell -3.5%. The Finance Sector ETF (XLF 11.91 -0.35) fell -2.9%. 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 117.03 -0.04) traded virtually unchanged and is in a trading state.. The BIAS of longer term bonds is BULLISH.

In addition to the crude oil inventory report, there were three economic reports released:

  • MBA Mortgage Index for last week rose +9.3% versus the prior week's +0.6%
  • Durable Goods Orders (Aug) fell -0.1% versus an expected +0.1%
  • Durable Orders ex-Transportation (Aug) fell -0.1% versus an expected -0.2%

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 fear of the unknown. The unknown, in this case, is whether the vote by the lower house in Germany's parliament would pass on Thursday. The vote is about whether to increase the size of the Euro zone bailout fund. With Germany having the largest economy in Europe, the vote is crucial to the stability of Europe.

Note: The vote was held during normal business hours in Germany, well before the open of U.S. markets and passed 523-85. This will remove some downside pressure on U.S. markets so they should open higher. This should also affect the Euro, which should move higher versus the U.S. dollar in reaction, which is also good for U.S. equities.

The U.S. dollar rose most of four tenths of one percent.

All ten economic sectors in the S&P-500 move lower higher led by Materials -4.5% followed by Energy -3.0%, Financials -2.9%, Industrials -2.4%, Health Care -1.7%, Consumer Staples -1.7%, Consumer Discretionary -1.7%, Tech -1.4%, Utilities -0.9%, and Telecom -0.6%.

The yield for the 10-year note fell two basis points to close at 2.00. The price of the near term futures contract for a barrel of crude oil fell $-3.24 to close at $81.21. The weekly U.S. government report on crude oil inventories showed an increase of +1.915M barrels.

Implied volatility for the S&P-500 (VIX 41.08 +3.37) 37.71 -1.31) rose nine percent and the implied volatility for the NASDAQ-100 (VXN 40.76 +3.11) 37.65 -1.59) rose eight percent. This puts them at the top of their down trending channel since they peaked on August 8th.

Market internals were negative with decliners leading advancers 4:1 on the NYSE and by 5:1 on the NASDAQ. Down volume led up volume 10:1 or more on both the NYSE and the NASDAQ. The index put/call ratio rose +0.40 to close at 2.01. The equity put/call ratio rose +0.21 to close at 0.83. When the Index Put/Call ratio rises above 2, it usually is a contrary indicator suggesting the major indexes will rise.


Wednesday was all about fear over a potential collapse of Greek sovereign debt. This particular fear was that the European bailout fund would not be increased and therefore the threat of contagion was higher. Market participants are extremely skittish with the markets regularly seeing intraday trading ranges of three percent or more. It is time to take a deep breath and realize the world isn't coming to an end.

With Wednesday's losses and without the catalyst of a failed vote in Germany, the markets are more likely to rally than sell-off further. In addition, the end of September is a seasonally strong period so we would look for the major indexes to fight higher at this time. It will be particularly important to monitor the action of auxiliary equity indexes as well as the strength or weakness of the U.S. dollar, bonds, and other significant indicators of the global economy, such as the price of copper, oil, and other economically sensitive commodities.

Yesterday, we stated, "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 were waiting for all three major indexes to be one percent higher and we were going to purchase put options. Since SPY never reached that level, we never bought the options and had to sit on our hands as we watched the fall of the major indexes. We will sit on our hands another day as we wait to see how the various moving parts interact on Thursday.

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


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