12/5/2011 8:09:11 AM

Markets gapped up and seller's took advantage....

Recommendation:
Take no action.

Click here to access our stock market chat rooms today! For a limited time, try our chat room for free. No subscription necessary to give it a try.

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.

Best ETFs to buy now (current positions):
Long DIA at $118.96
Long QQQ at $57.40
Long SPY at $124.79

Click here to learn more about my services and for our ETF Trend Trading.

Value Portfolio:

Daily Trading Action

The major indexes opened significantly higher and after dipping in the first fifteen minutes, moved higher for the remainder of the first hour of trading. After that, it was a constant sell-off until the close with the major indexes all closing near the unchanged line. That meant a slight loss for all three ETFs that represent the major indexes. The semiconductor index (SOX 374.57 -0.74) saw a modest fractional loss at the close. It retains a BEARISH BIAS and sits even with its 20-Day Moving Average. The Russell 2000 (IWM 73.50 +0.30) posted a modest fractional gain and the Dow Jones Transport Index (IYT 88.42 +0.74) actually posted a strong fractional gain. The Bank index (KBE 19.31 +0.25) posted a gain of more than one percent and the Regional Bank Index (KRE 23.59 +0.21) fell just short of a one percent gain. The Finance Sector ETF (XLF 12.91 +0.17) posted a better than one percent gain as well. All equity indexes are now in trading states with the exception of the Regional Bank Index which is in an uptrend state. There is a real mixed bag of BIASES from just BULLISH to NEUTRAL to just BEARISH. It won't take much for all of them to align in one direction or another. Long term bonds (TLT 118.64 +1.64) had a strong showing with a gain of more than one percent. It remains in a trading state and retains its BULLISH BIAS. Trading volume was light 865M shares traded on the NYSE and with 1.380B shares traded on the NASDAQ.

There were five economic reports released:

• Nonfarm Payrolls (Nov) added 120K jobs versus an expected 123K
• Nonfarm Private Payrolls (Nov) added 140K jobs versus an expected 141K
• Unemployment Rate (Nov) fell to 8.6% versus an expected 9.0% reading
• Hourly Earnings (Nov) fell -0.1% versus an expected +0.2% gain
• Average Workweek (Nov) came in at 34.3 hours as expected

All five reports were released an hour before the open.

The gap up open was sold immediately and in the ensuing rally, many traders became more bullish and traded an expected bounce. That bounce didn't last longer than the first hour of trading and all who jumped in were disappointed on a fool's errand. With that said, there is a meeting expected on Monday between Germany's Chancellor Angela Merkel and France's President Nicolas Sarkozy to discuss and align on next steps to make the Euro more stable in light of runaway European debt. Within a week, leaders of Euro nations will come together on the same subject. Perhaps the fool's errand shall prove to be fruitful after all.

The U.S. dollar rose nearly one third of one percent.

Financials, Consumer Discretionary, and Industrials were strong while Materials, Utilities, and Healthcare were weak.

The yield for the 10-year note fell eight basis points to close at 2.04. The price of the near term futures contract for a barrel of crude oil gained seventy-six cents to close at $100.96.

Implied volatility for the S&P-500 (VIX 27.52 +0.11) rose modeslty and the implied volatility for the NASDAQ-100 (VXN 27.69 +0.49) tacked on two percent. Both the VIX and VXN traded down to their 200-DMA before rebounding.

Market internals were positive with advancers leading decliners 3:2 on both the NYSE and the NASDAQ. Up volume led down volume 3:2 on the NYSE and by a modest amount on the NASDAQ. The index put/call ratio rose 0.16 to close at 1.34. The equity put/call ratio fell 0.06 to close at 0.59.

Conclusion/Commentary

Friday saw very light volume for a Friday. The gap up open followed by the slide through most of the session was more of a buyers strike than short selling. Market internals were positive even though all the major indexes finished relatively flat. The surprising upside of the economic reports wasn't enough to hold through the session. I believe that there are continued worries over the European sovereign debt issues and we are about a week out from the next significant meeting to move that agenda forward.

The dollar and longer-term bonds are key indicators at this time. Both were forming tops and finally committed to moving lower last week. With that said, both also see intraday rallies which could set up a larger plunge in the coming week. If we get that then equities should move in an inverse manner and the end of year "Santa Claus" rally should get underway.

We continue to expect a scenario to unfold where a rally into the end of the year is possible. We will have to be careful here in that another day of pull-back is likely before a resounding trip higher. However, it is important to note that downside action could again get underway in a more significant manner and we might have to shift to a more bearish posture. We will wait to see how this is likely to be resolved and take new or reverse current positions accordingly.

Note: I am officially a grandfather. My daughter delivered my grandson in the wee hours of the morning on Saturday after 3 days of labor. I was tired from the lack of sleep as I am sure she was but mother and son are healthy and I am awaiting their discharge from the hospital.

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