10/10/2011 8:42:09 AM

The bears did their job by containing the bulls...

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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.

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- 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 higher (actually, the NASDAQ-100 opened just below flat) and traded down through the morning, up through the afternoon to surpass the higher open (and move into positive territory for the NASDAQ-100) before being crushed in the final half hour to see all three major indexes post losses. Volume for the major index ETFs was below average with the volume for SPY nearly average. All equity indexes we regularly monitor are now in trading states as are long-term bonds. The Dow Jones Transport Index (IYT 78.15 -1.08) fell -1.4%. The Russell-2000 (IWM 65.50 -1.64) was hit for a -2.4% loss. The semiconductor Index (SOX 356.73 +1.56) resisted downward pressure and posted a fractional gain. The Regional Bank Index (KRE 19.93 -1.02) was crushed for a -4.9% loss. 20.95 +0.63). The Finance Sector ETF (XLF 11.83 -0.44) took a hefty -3.6% loss. The Bank Index (KBE 17.70 -0.76) was rocked for a -4.3% loss. Long term bonds (TLT 118.24 -0.88) posted a fractional loss after rallying modestly off a lower open. It is in an trading state. The BIAS of longer term bonds is BULLISH. NYSE volume came in below average with 1.137B shares traded. NASDAQ volume was above average with 2,080B shares traded.

There were seven economic reports released:

• Nonfarm Payrolls (Sep) came in at +103K versus an expected 60K
• Nonfarm Private Payrolls (Sep) came in at +137K versus an expected +83K
• Unemployment Rate (Sep) came in at 9.1% as expected
• Hourly Earnings (Sep) rose +0.2% expected
• Average Work Week (Sep) rose to 34.3 hours versus an expected 34.2 hours
• Wholesale Inventories (Aug) came in at +0.4% versus an expected +0.5%
• Consumer Credit (Aug) fell -$9.5B versus an expected +$7.0B rise

The first five reports were released an hour before the open. The Wholesale Inventories report was released a half hour after the open and the Consumer Credit report was released an hour before the close.

The U.S. dollar rose most of three tenths of one percent after opening higher.

The yield for the 10-year note rose eight points to close at 2.07. The price of the near term futures contract for a barrel of crude oil rose thirty-nine cents to close at $82.98.

Implied volatility for the S&P-500 (VIX 36.20 -0.07) closed essentially flat. The implied volatility for the NASDAQ-100 (VXN 37.08 -0.24) closed fractionally lower.

Market internals were negative with decliners leading advancers 5:2 on the NYSE and by 3:1 on the NASDAQ. Down volume led up volume 4:1 on the NYSE and by 3:1 on the NASDAQ. The index put/call ratio fell -0.25 to close at 1.51. The equity put/call ratio was unchanged at 0.69.

Commentary:

Friday saw a retreat from risk. While the economic reports were positive an hour before the open, the media pounced on the better than expected jobs report and said that most of the better than expected number was striking Verizon workers returning to work. It seems they went out of their way to make investors nervous and the markets took a nose dive. As the day progressed, the markets recovered their lost ground and it looked like there would be a positive finish until the final half hour saw all those gains and then some washed away to see all the major indexes post fractional losses.

The bears did what they had to do in order to keep the issue in doubt. They didn't do it convincingly so it sets up another confrontation on Monday. Implied volatility is almost unchanged from Thursday and actually came down modestly so option writers aren't too worried.

Equity indexes are poised below key moving averages to assault them on Monday. It will be important how they finish in relation to these. It will also be important that financials recover some of the drubbing they took on Friday and that the leading indexes lead the way higher (like the semiconductors managed on Friday). Anything less suggests the market will move back into a bearish dominated bias.

Friday's volume wasn't light but it wasn't heavy either. The bulls and bears are keeping each other honest and are locked in a desperate battle. The bulls haven't completely lost their momentum but the bears are keeping them off balance. We will shift from our long positions if the bulls can't manage to do better shortly.

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