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European News Dominates the Day...

12/6/2011 9:05:11 AM

Fivefold news on Europe moves markets....

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Stock Market Trends:

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 indexes opened significantly higher and after dipping in the first fifteen minutes, then, for the most part, moved higher for another hour of trading. Action was sideways through the rest of the morning and the lunch hour. Shortly after the lunch hour ended, equities prices began to decline and that decline lasted until an attempted rally shortly after 2:00pm that failed within an hour with the bears driving prices to their low of the day by 3:30pm. At that time, the bulls stepped in and bought aggressively all the losses since the failed rally attempt and leaving the major indexes with gains just either side of one percent. The semiconductor index (SOX 378.12 +3.55) gained nearly one percent and moved back above its 20-Day Moving Average (DMA). The Russell 2000 (IWM 74.76 +1.26) rose 1.7%. The Dow Jones Transport Index (IYT 89.83 +1.41) added +1.6%. The Bank index (KBE 19.71 +0.40) rose more than two percent and the Regional Bank Index (KRE 24.04 +0.45) rose just under that amount. The Finance Sector ETF (XLF 13.17 +0.26) rose two percent as well. All equity indexes we regularly monitor have shifted into uptrend states with the exceptions of the semiconductor index and the bank index, which are in trading states. Equity indexes that we regularly monitor currently have a BEARISH BIAS with the exception of the Regional Bank Index and the Dow Jones Transport Index. Long term bonds (TLT 118.40 -0.24) closed modestly lower after a gap down open and fighting its way higher through the session. It remains in a trading state and retains its BULLISH BIAS. Trading volume was light 893M shares traded on the NYSE and with 1.190B shares traded on the NASDAQ.

There were two economic reports released:

  • Factory Orders (Oct) fell -0.4% as expected
  • ISM Services (Nov) came in at 52.0 versus an expected 53.4

Both reports were released a half hour after the open.

European markets were up significantly on news that Italy had passed a 30B Euro austerity plan. In addition, the European Central Bank (ECB) is preparing a 1 trillion Euro injection through a bond buying program. Germany's Merkel and France's Sarkozy also met and came away agreeing on implementation issues. This propelled U.S. equities to gap higher and head even higher before S&P credit ratings announcements caused market participants to begin shedding stocks. The first was that AAA rated countries in Europe would be placed on credit watch negative. After that, a second announcement was released that said all 17 Euro nations will be placed on ratings downgrade watch. This sent U.S. equity markets tumbling.

The U.S. dollar closed even with last Friday. The dollar opened significantly lower but rose throughout the day.

The yield for the 10-year note rose a single basis point to close at 2.05. The price of the near term futures contract for a barrel of crude oil gained three cents to close at $100.99.

Implied volatility for the S&P-500 (VIX 27.84 +0.32) rose a bit more than one percent. The implied volatility for the NASDAQ-100 (VXN 27.89 +0.20) added a fractional gain.

Market internals were positive with advancers leading decliners 7:2 on the NYSE and by 9:4 on the NASDAQ. Up volume led down volume 7:1 on the NYSE and by 3:1 on the NASDAQ. The index put/call ratio fell -0.09 to close at 1.25. The equity put/call ratio rose 0.10 to close at 0.69.


Conclusion/Commentary

Monday saw an increase in volume but it was still light. The gap up open followed by the slide through most of the session was quite similar to the action we saw on Friday. Clearly there are two camps (bulls and bears) wrestling for control with neither side having a clear advantage. Market internals were overwhelmingly positive and most equity indexes we follow are now in uptrend states. With that said, the intermediate term direction is clouded with most equity indexes having a BEARISH BIAS.

Once again, it was European issues that moved the markets. In this case, there were all sorts of positive events stemming from government actions but the biggest impact of the day was first the rumor of S&P downgrading some AAA European sovereign credit ratings and then the increase of that threat to all 17 members of the Euro using European Union.

S&P seems to be in the lead among credit rating agencies to be looking for potential problems. To be honest, they and the other credit rating agencies, should have been doing this all along. They and their fellows were asleep at the switch assigning AAA credit ratings to Mortgage Backed Securities (MBS) that contained subprime loans, etc.

With all that said, it doesn't really change the landscape any more than it did when they downgraded U.S. bonds from AAA to one notch lower. Investors worldwide still clamor for U.S. bonds more than any other security.

The dollar traded sideways and the S&P-500 opened above its 200-DMA but was unable to hold onto those gains and slipped back to close below that important level. We could be looking at a day or two of pull-back or worse.

We continue to expect a scenario to unfold where a rally into the end of the year is possible. We are going to monitor market action to attempt to discern whether a little weakness is setting us up for a run higher or whether it is time to reverse our trades. Stay tuned.

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

 

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