10/12/2011 8:41:17 AM

Mixed close as traders digest Monday's gains...

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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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Value Portfolio:

Daily Trading Action

The major index ETFs opened fractionally lower and then began to move higher almost immediately reaching their zenith just before 11:00am. The rest of the session would be choppy moving sideways and closing not too far off the highs. This left the Dow closing with a modest loss, the S&P-500 closing with a modest gain, and the NASDAQ-100 closing with a somewhat strong fractional gain. This left all three major indexes above both their 20-Day and 50-Day Moving Averages (DMAs) and with the NASDAQ-100 sitting atop its 200-DMA, the only equity index we regularly report on to do so. The Dow Jones Transport Index (IYT 81.68 +0.59) finished with a strong fractional gain as did the Russell-2000 (IWM 68.84 +0.47). The semiconductor Index (SOX 365.70 -1.09) finished with a modest loss. The Bank Index (KBE 18.75 +0.14) tacked on a strong fractional gain as did the Regional Bank Index (KRE 21.25 +0.21). The Finance Sector ETF (XLF 12.43 -0.01) essentially traded flat. Long term bonds (TLT 116.18 -0.39) posted a modest loss. It is in a trading state. The BIAS of all equity indexes we regularly monitor is BEARISH but all have warned of a potential move to a BULLISH BIAS. The BIAS of longer term bonds is BULLISH but has warned of a potential move to a BEARISH BIAS. NYSE volume came in light with 881M shares traded. NASDAQ volume was light with 1.460B shares traded.

Since there were no economic reports released, the focus was on Slovakia's vote to expand the EFSF (European Financial Stability Fund). Slovakia put off the vote to approve an expansion of the EFSF which had initially caused the U.S. dollar to rally versus the Euro. While the consensus is that any vote in Slovakia that didn't approve the expansion of the EFSF on the first round, would be followed up by another vote that would eventually approve the expansion. However, internal politics within Slovakia suggest that the ruling party in Slovakia would change before an approval might take place. This leaves the issue in doubt, but the chances are very high that the EFSF vote will eventually pass.

The U.S. dollar fell a tenth of one percent after gapping up at the open.

The yield for the 10-year note rose eight basis points to close at 2.16. The price of the near term futures contract for a barrel of crude oil rose forty cents to close at $85.81.

Implied volatility for the S&P-500 (VIX 32.86 -0.16) fell one half of one percent. The implied volatility for the NASDAQ-100 (VXN 34.10 -0.38) fell one percent.

Market internals were positive with advancers leading decliners 5:4 on the NYSE and by 3:2 on the NASDAQ. Up volume led down volume 3:2 on both the NYSE and the NASDAQ. The index put/call ratio rose +0.24 to close at 2.03. The equity put/call ratio rose +0.15 to close at 0.78. Usually, when the index put/call ratio moves above 2.0, the market is protected from significant downside.

Tuesday saw another day of light trading volume as the major indexes digested Monday's aggressive three percent gains. Alcoa (AA) kicked of earnings season after the close reporting better than expected revenues but lower than expected earnings. After hours, this send the Dow component down four percent.

With the start of earnings season, there will be an effect on the major indexes based on whether companies outperform or underperform expectations. However, the major influence on equity indexes will still be the global economy and, in particular, Europe's ability to thread the needle to maintain confidence such that investors will continue to purchase European sovereign debt even as the European Central Bank (ECB) prints ever more Euros. The latest plan hatched by German Chancellor Merkel and French President Sarkozy seems to by pacifying investors at this time. As long as confidence continues (well, until it doesn't continue), the U.S. dollar can fall and U.S. equities can rise in response.

Commentary:

With earnings season kicking in, we have potential for upside and downside moves based on earnings beats and misses as well as guidance. Perhaps even more important late in the year is the resolution of partisan rankling in the pre-election year in the United States of America. Confidence, or the lack thereof, in our executive and Congressional branches will ebb and flow along with our elected representatives ability to show they can lead and appear functional. Thus far, the public has seen far too much dysfunctional actions and a lack of leadership, which isn't conducive to bullish action from market participants.

Since we were monitoring a potential bottom for the U.S. dollar and we didn't get it yet, it is still game on for U.S. equity bulls. We will maintain our long positions until we see signs that this bullish advance has run its course.

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