12/2/2011 7:32:35 AM

Volume lightens up as U.S. markets search for direction....

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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 indexes opened modestly lower and then moved higher in the first forty-five minutes of trading. The major indexes then moved lower into late morning before beginning to rebound. The lunch hour sold modest selling followed by another bounce at the end of the lunch hour. The rest of the afternoon was spent in mixed fashion with the NASDAQ-100 rallying and the S&P-500 and Dow easing from their afternoon highs put in around 2:00pm. The major indexes closed mixed with the NASDAQ-100 putting in a solid fractional gain and with the Dow and S&P-500 finishing about one fifth of one percent lower. The semiconductor index (SOX 375.31 _1.99) posted a fractional gain but retains its BEARISH BIAS and sits even with its 20-Day Moving Average. The Russell 2000 (IWM 73.20 -0.53) notched a fractional loss as did the Dow Jones Transport Index (IYT 87.68 -0.65). The Bank index (KBE 19.06 -0.15) and Regional Bank Index (KRE 23.38 -0.22) both notched fractional losses on the day as did the Finance Sector ETF (XLF 12.74 -0.07). All equity indexes are now in trading states and they are mixed in terms of BIAS with none being that far from neutral. Long term bonds (TLT 117.00 -0.59) posted a fractional loss and collapsed below its 50-DMA. It remains in a trading state and retains its BULLISH BIAS. Trading volume was light 795M shares traded on the NYSE and with 1.570B shares traded on the NASDAQ.

There were four economic reports released:

• Initial Jobless Claims for last week came in at 402K versus an expected 390K
• Continuing Jobless Claims came in at 3.740M versus an expected 3.650M
• ISM Index (Nov) came in at 52.7 versus an expected 51.0
• Construction Spending (Oct) rose +0.8% versus an expected rise of +0.3%

The first two reports were released an hour before the open. The remaining two reports were released a half hour into the session. The ISM report was really significantly stronger than expected as was construction spending. These weren't enough to propel the market much higher however.

China reported a PMI reading of 49.0 for November following the 50.4 reading in October. This is the first time their economy has shown a contraction and may be the reason the Chinese Central Bank eased reserve requirements on Wednesday.

The U.S. dollar was relatively unchanged falling just slightly.

Two of ten economic sectors in the S&P-500 moved higher with Tech +0.6% and Health Care +0.1%. Consumer Discretionary was unchanged and the losers were led by Financials -1.0%.

The yield for the 10-year note rose five basis points to close at 2.12. The price of the near term futures contract for a barrel of crude oil fell sixteen cents to close at $100.20.

Implied volatility for the S&P-500 (VIX 27.41 -0.39) fell more than one percent and the implied volatility for the NASDAQ-100 (VXN 27.20 -0.57) fell two percent. The VXN is now only about four percent above its 200-DMA while the VIX is about eight percent above that important indicator.

Market internals were mixed with advancers leading decliners 3:2 on the NYSE and by 7:4 on the NASDAQ. Down volume led up volume by nearly 5:4 on the NYSE while up volume led down volume 3:2 on the NASDAQ. The index put/call ratio fell -0.04 to close at 1.18. The equity put/call ratio rose 0.10 to close at 0.65.

Conclusion/Commentary

Thursday saw volume lighten up again as both bulls and bears positioned for the next move. Market internals were mixed and we would expect more movement on Friday. The direction of that move may depend on the non-farm payrolls and unemployment numbers released an hour before the open on Friday.

We continue to expect a scenario to unfold where a rally into the end of the year is possible. Last week, all we read about was how a new bear market was at hand. We do recall one other newsletter that was optimistic. Now, with the bounces seen on Monday and Wednesday, we are seeing dogged pessimism for the most part but with some writers recognizing a shift has occurred. When that shift is recognized on a wider scale, the markets will be set-up to put in another top. Until then, we will remain long continuing to look for the opportunity to shift position ahead of the crowd.

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