10/17/2011 8:41:42 AM

S&P-500 break-out allows equities to post best weekly performance in two years...

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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 higher and then traded mixed for the first half hour before all three major indexes began to march lower in a channel that wasn't broken until noon. From there, the move higher began, also in a channel that lasted until buying action in the final half hour saw a powerful break upward out of the channel for a very strong finish, albeit on light volume. This left the NASDAQ-100 in an uptrend state. Both the semiconductor index (SOX 380.86 +4.26) and and Regional Bank Index (KRE 21.54 +0.19) joined the NASDAQ-100 to finish in an uptrend state. The Dow Jones Transport Index (IYT 84.02 +1.82) was able to add two percent on light trading. The Russell-2000 (IWM 71.14 +1.38) added nearly two percent as well. The Bank Index (KBE 18.91 +0.13) added a fractional gain while the Finance Sector ETF (XLF 12.60 +0.15) manage a gain of more than one percent. Long term bonds (TLT 113.95 -1.68) lost a bit more than one percent. 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 787M shares traded. NASDAQ volume was also light with 1.400B shares traded.

There were seven economic reports released:

• Retail Sales (Sep) rose +1.1% versus an expected +0.6% rise
• Retail Sales ex-auto (Sep) rose +0.6% versus an expected +0.3% rise
• Export Prices ex-agriculture (Sep) rose 0.3%, the same as for Aug
• Import Prices ex-oil (Sep) rose 0.2%, the same as for Aug
• Univ of Michigan Consumer Sentiment (Oct) came in at 57.5 versus an expected 60.0
• Business Inventories (Aug) rose +0.5% versus an expected +0.4% rise
• Treasury Budget (Sep) came in at -$64.6B versus an expected -$67.0B

The first four reports were released an hour before the open. The next two were released twenty-five and thirty minutes after the open. The final report was released at 2:00pm EDT. With the noted exception of the University of Michigan's Consumer Sentiment Index, all of the reports met or exceeded expectations. The Michigan Consumer Sentiment Index for October will be revised again in the near future and it may then meet expectations. While it seems to have affected initial market direction with the move lower by equities after its release, that bearishness was clearly overcome in late session trading.

The U.S. dollar fell most of one half of one percent breaking and closing below its 200-Day Moving Average (DMA) for the first time since mid-September. A falling U.S. dollar helps U.S. equities to move higher.

Market watchers had a line in the sand drawn at 1,220 for the S&P-500. That marks the high close on August 31st (1,218.89). The late day push to close at 1,224.58 caught the bears sleeping and resistance has been broken with the highest close achieved since early August. The July 7th top was at 1,352.22. That will likely be the next area that bulls and bears will identify as the next major front in their battle for control of the S&P-500.

The yield for the 10-year note rose six basis points to close at 2.23. The price of the near term futures contract for a barrel of crude oil rose $2.57 to close at $86.80.

Implied volatility for the S&P-500 (VIX 28.24 -2.46) fell eight percent. The implied volatility for the NASDAQ-100 (VXN 28.69 -1.61) dropped five percent. Implied volatility broke below the low end of its range since early August. We thought it would likely bounce but it appears that option writers believe that there will be less volatility going forward.

Market internals were positive with advancers leading decliners 5:1 on the NYSE and by 3:1 on the NASDAQ. Up volume led down volume 6:1 on the NYSE and by 3:1 on the NASDAQ. The index put/call ratio was nearly unchanged rising 0.01 to close at 1.36. The equity put/call ratio fell -0.12 to close at 0.60.

Conclusion/Commentary

Friday was a light volume trading day with a definitive bullish characteristic. However, this bull is long in the tooth and we are looking for a pull back next week. The move up for the week was the strongest seen in two years. With some equity indexes actually entering uptrend states, this move could last longer than we are predicting but several things are aligning that suggest we will get, at least, an overbought correction of some sort. The three major indexes have all reached overbought levels (on our proprietary scale) already. With the support equity indexes likely to reach these levels shortly, a pull-back of some sort is a high probability.

The leading indexes (NASDAQ-100, Semiconductor Index, Russell-2000, and Dow Jones Transport Index) have provided leadership with the Financials supporting the move. We are waiting for the inevitable top to be put in, even as equity indexes are setting up to move toward a BULLISH BIAS in the near future.

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