10/3/2011 9:03:11 AM

The last day of September sees a shart sell-off igniting new fears of another market melt-down.

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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 more than one percent lower and moved still lower before reversing a half hour into the session and see-sawing higher into late morning. Just before noon, a move lower began that would intensify into the close as the final fifteen minutes were just an express elevator down. This shifted the NASDAQ-100, S&P-500, and the Semiconductor Index into downtrend states with the Russell-2000 all but there was well. The Dow Jones Transport Index (IYT 75.24 -2.76) lost -3.5%. The Russell-2000 (IWM 64.30 -2.03) fell -3.1%. The semiconductor Index (SOX 338.82 -12.00) fell -3.4%. The Regional Bank Index (KRE 19.31 -0.72) fell -3.5% and the Bank Index (KBE 17.54 -0.71) fell -3.9%. The Finance Sector ETF (XLF 11.81 -0.43) lost -3.5%. Only the Dow and the finance related ETFs are in trading states with the other equity indexes in downtrend states or on the cusp. All equity indexes we monitor 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 120.80 +2.96) rose 2.5% and shifted to an uptrend state.. The BIAS of longer term bonds is BULLISH.

There were five economic reports released:

• Personal Income (Aug) fell -0.1% versus an expected +0.1% rise
• Personal Spending (Aug) came in at +0.2% as expected
• PCE Prices-Core (Aug) rose +0.1% versus an expected +0.2% rise
• Chicago PMI (Sep) came in at 60.4 versus an expected 54.0
• UniversityofMichigan Consumer Sentiment (Sep) came in at 59.4 versus an expected 57.5

The first three reports were released an hour before the open and the other two followed within the first twenty-five minutes of the session open. With incomes falling and prices rising, the consumer is being squeezed. Even the better than expected Chicago PMI and Consumer sentiment numbers weren't enough to cause market participants to be optimistic.

The potential of a Greek default is growing darker. Investors essentially ignored the votes to expand the European Financial Stability Fund (EFSF) and instead have embraced the relative certainty of a Greek default. Greece will run out of money in mid-October if the 8 billion Euro in aid isn't released before then. This would cause a messy default on Greek sovereign debt bit with debt of 172% of GDP, it is essentially impossible for Greece to repay its debts at present levels. This casts a pall over global economies as contagion from a Greek default will likely sink Europe into recession, if it isn't already there.

The U.S. dollar rose one percent to its highest level since February.

Materials (-3.7%) and Financials (-3.5%) led the slide as all ten economic sectors in the S&P-500 moved lower..

The yield for the 10-year note fell four basis points to close at 1.92. The price of the near term futures contract for a barrel of crude oil fell -$2.94 to close at $79.20.

Implied volatility for the S&P-500 (VIX 42.96 +4.12) rose +10.6% breaking above resistance. It could be signaling a forthcoming retest and potential break of this year's low for the S&P-500. The implied volatility for the NASDAQ-100 (VXN 44.98 +3.82) rose +9.3% closing at its highest level since early January 2009. We believe this signals a likely retest of the year's low and a potential break of that low. That is a move of more than five percent so it will instill significant fear if it comes about.

Market internals were negative with decliners leading advancers nearly 4:1 on the NYSE and by 10:3 on the NASDAQ. Down volume led up volume 13:1 on the NYSE and by 6:1 on the NASDAQ. The index put/call ratio rose +0.09 to close at 1.59. The equity put/call ratio was nearly unchanged falling -0.01 to close at 0.80.

Commentary:

Friday played out as we expected, with the noted exception of the large gap down. We were expecting better entries to our short trades. There is so much uncertainty about the forthcoming Greek default and how it will be handled by the various bodies politic in Europe that it will likely keep the markets on edge for quite some time. It makes the U.S. dysfunctional Congress and executive branches look well behaved by comparison. Clearly, the U.S. has its work cut out for itself in getting its fiscal house in order. Decades of rampant over spending and dubious fiscal and monetary policies will have to be curbed and our politicians aren't used to having to make tought decisions of this caliber.

We believe that U.S. equities markets will have to retest this years lows at a minimum. We will go further to predict a break of those lows for some equity indexes. It is a matter of which indexes break their lows. The most watched will be the S&P-500. The Dow is showing relative strength at this time but would likely follow the lead of the S&P-500 on any significant break down. The real litmus test, however is the runaway NASDAQ-100. Its low is more than five percent below Friday's closing value. A retest would be significant. A break of the low would ensure bearish sentiment would emerge and likely confirm a new bear market. Stay tuned.

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