12/1/2011 8:14:23 AM

Central banks coordinated intervention revives bulls....

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Daily Trading Action

The major indexes opened markedly higher and continued that upward move for the first hour and a half of trading. A slow downward drift then occurred with an initial move higher commencing with two hours left. That move failed and a successful retest of the intraday lows occurred with a rally in the final hour ensuring that the major indexes closed with the best single session gains since the market bottom in March 2009. Gains of +3.7% to 4.33% were recorded. This left both the Dow and NASDAQ-100 above all three moving averages we regularly report on and with the S&P-500 below only its 200-Day Moving Average (DMA). The Dow shifted into a nascent uptrend state with the NASDAQ-100 and S&P-500 in trading states. The NASDAQ-100 retains its BEARISH BIAS with the S&P-500 neutral and the Dow has a BULLISH BIAS. The semiconductor index (SOX 373.32 +20.70) gained 5.9% but has a BEARISH BIAS and sits below its 20- and 200-DMAs. The Russell 2000 (IWM 73.73 +3.93) gained +5.6% and is in an uptrend state but still sits below its 200-DMA. The Dow Jones Transport Index (IYT 88.33 +4.14) gained +4.9% and is in an uptrend state with a BULLISH BIAS but has yet to close above its 200-DMA. The Bank index (KBE 19.21 +1.19) added +6.6% to mostly lead equity indexes higher but was trumped by the +7.4% gains for the Regional Bank Index (KRE 23.60 +1.62).. The Finance Sector ETF (XLF 12.81 +0.74) gained +6.1%. All equity indexes, save the Dow and NASDAQ-100 remain below their 200-DMAs with the Dow, Regional Bank Index, and Dow Jones Transport Index sporting BULLISH BIASes. Only the NASDAQ-100 and Bank Index have a BEARISH BIAS with the others being NEUTRAL. Long term bonds (TLT 117.88 -1.87) slid -1.6% and collapsed below its 20-DMA. It fell to a trading state but retains its BULLISH BIAS. Trading volume was above average with 1.667B shares traded on the NYSE and with 1.840B shares traded on the NASDAQ.

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

• MBA Mortgage Index for last week fell -11.7%
• Challenger Job Cuts (Nov) declined -12.8% versus October's increase by +12.6%
• ADP Employment Change (Nov) came in at +206K versus an expected 125K jobs
• Productivity-Rev (Q3) came in at +2.3% versus an expected rise of +2.6%
• Unit Labor Costs (Q3) fell -2.5% versus an expected fall of -2.1%
• Chicago PMI (Nov) came in at 62.6 versus an expected 57.5
• Pending Home Sales (Oct) increased 10.4% versus an expected +0.1% gain

The first five reports were released an hour or more before the open. The remaining two reports were released fifteen and thirty minutes after the open. With job cuts lower than expected and payrolls higher than expected, futures shifted higher and hour before the U.S. equities markets opened for trading. With two hours remaining in the session, the Fed released its beige book and it showed what was expected. That is, in eleven of twelve districts were experiencing slow to moderate growth and only the St. Louis Fed reported a decline in activity.

The big news of the day came in two parts before the U.S. equities market opened. The first part was China reducing reserve requirements for Chinese banks by one half of one percent. This will provide a lot of liquidity as these funds become available for private lending. The second was action by multiple central banks led by the U.S. Federal Reserve. The action makes more U.S. dollars available through swap lines through other central banks. In addition, the interest rates charged would be halved. Other central banks will extend credit to their banks and the banks will extend funding to others, etc. This sent the dollar lower and the price of dollar based commodities significantly higher.

The U.S. dollar fell nearly another one percent. The top that we have been anticipating appears to be here. Of course, this was helped by the coordinated intervention by many of the world's largest central banks.

All ten economic sectors in the S&P-500 moved higher led by Financials +6.6% with the rest coming in order: Materials +5.9%, Energy +5.5%, Industrials +5.1%, Tech +4.0%, Health Care +3.7%, Telecom +3.3%, Consumer Discretionary +3.2%, Utilities +2.8%, and with Consumer Staples +2.4% bringing up the rear.

The yield for the 10-year note rose seven basis points to close at 2.07. The price of the near term futures contract for a barrel of crude oil rose fifty-seven cents to close at $100.36. The weekly U.S. government report on crude oil inventories showed an increase of 3.932M barrels.

Implied volatility for the S&P-500 (VIX 27.80 -2.84) fell more than nine percent and the implied volatility for the NASDAQ-100 (VXN 27.77 -3.29) fell more than eleven percent. Both are at relatively low levels not seen since late October when the market peaked last.

Market internals were positive with advancers leading decliners 7:1 on the NYSE and by 5:1 on the NASDAQ. Up volume led down volume 25:1 on the NYSE and by 11:1 on the NASDAQ. The index put/call ratio fell -0.18 to close at 1.22. The equity put/call ratio fell -0.08 to close at 0.55.

Conclusion/Commentary

Wednesday saw volume heat up with half again to double the volume we have been seeing of late. The move was decidedly lopsided in favor of the bulls with both the Dow and NASDAQ-100 moving back above all the moving averages we regularly report on and the S&P-500 only still below its 200-DMA. In addition, four of the equity indexes we regularly report on are back in uptrend states and the others are in trading states. After Tuesday's session, we asked, "how far the bulls can push back against the bears?" The answer was about four percent or more in a single day. That is the biggest rally since the March 2009 bottom.

Market internals were overwhelmingly positive. We were looking for the equity indexes to shift back into trading states from downtrend states and we got more than we were looking for with a few indexes actually shifting into uptrend states. The major indexes have moved up to technical resistance levels that will either refute the bulls or crush the bears if they break higher here. With the dollar and longer-term bonds beginning to collapse, we think the bulls have the edge but equities have made a huge move in the last three sessions and may need to take a breather which could give the bears a chance. We will wait to see how this plays out before choosing sides but will remain long in the interim.

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