12/9/2011 9:00:42 AM

European ECB President bursts the QE balloon, for now.

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Daily Trading Action

The major indexes opened lower and moved higher for the first half hour of trading before rolling over and beginning a saw toothed moved lower that would last the entire session. This caused the NASDAQ-100 to close just below its coincident 50- and 200-Day Moving Averages (DMAs) with a loss of 1.7%. The Dow matched that loss but managed to stay above all moving averages we regularly monitor but slipped into a trading state. The S&P-500 lost 2.2% by the close dragged down by financials. Even with the large loss, the S&P-500 maintained itself above the 20- and 50-DMAs but relinquished its nascent move above the 200-DMA. The semiconductor index (SOX 371.13 -10.72) fell 2.8% closing back below all moving averages we regularly report on. The Russell 2000 (IWM 72.36 -2.32) fell 3.1% but maintained its position above the 20- and 50-DMAs. The Dow Jones Transport Index (IYT 86.96 -2.18) made a similar move losing -2.4%. The Bank index (KBE 19.01 -0.68) fell 3.5% and also maintained its position atop the 20- and 50-DMAs. The Regional Bank Index (KRE 23.11 -0.81) fell -3.4% also maintaining position above the 20- and 50-DMAs. The Finance Sector ETF (XLF 12.82 -0.52) lost a whopping -3.9% but also held above its 20- and 50-DMAs. All equity indexes are in trading states with the Regional Bank Index having a BULLISH BIAS and the Dow Jones Transports sporting a NEUTRAL BIAS. The others have a BEARISH BIAS at this time. Long term bonds (TLT 119.16 +1.47) tacked on 1.25% closing back above its 20-DMA in a trading state and retains its BULLISH BIAS but is leaning toward a shift to a BEARISH BIAS. Trading volume was light 930M shares traded on the NYSE and with 1.600B shares traded on the NASDAQ.

There were three economic reports released:

• Initial Jobless Claims for last week dropped to 381K versus an expected 395K
• Continuing Jobless Claims came in at 3.583M versus an expected 3.700M.
• Wholesale Inventories (Oct) rose +1.6% versus an expected versus an expected +0.2% rise.

The first two reports were released an hour before the open surprised to the upside actually shifting futures strongly into positive territory. The final report was released a half hour after the open.

The big news of the day came in three parts. The first was that the European Central Bank (ECB) would reduce interest rates by one quarter of one percent from 1.25% to 1.0%. The second item was that the Bank of England (BoE) would keep rates the same. The third was provided in a speech following the ECB interest rate announcement. ECB President Draghi announced that the ECB had no immediate plans to buy European bonds, a form of quantitative easing, which infuriated market participants. It seems obvious to market participants that this step will have to be taken and they voted with their feet when it was denied. As it turns out, Draghi was likely using this as a bargaining chip prior to the commencement of the European summit at 7:30pm local time in Brussels.

Note: The European summit that began as a dinner meeting ended up continuing for nine hours with the end result that 23 out of 27 members of the European Union (EU) and all 17 members that use the Euro voted to strengthen the EU by following fiscal guidelines for budgets or risk sanctions. The details will be hammered out by next March but an agreement was reached, which is a positive for the markets.

The U.S. dollar climbed just over one half of one percent in a flight to safety bid.

All ten economic sectors in the S&P-500 closed lower led by Financials which sold off -3.7%. The sectors that lost the least were the usual suspects Consumer Staples -1.0%, Utilities -1.5%, Healthcare -1.8%, and Telecom -1.8%. In addition, Tech -1.5% also showed relative strength which is bullish for U.S. equities.

The yield for the 10-year note fell three basis points to close at 1.99. The price of the near term futures contract for a barrel of crude oil fell $2.15 to close at $98.34.

Implied volatility for the S&P-500 (VIX 30.59 +1.92) rose +6.7% and the implied volatility for the NASDAQ-100 (VXN 30.00 1.55) rose +5.5%.

Market internals were negative with decliners leading advancers 6:1 on the NYSE and by 3:1 on the NASDAQ. Down volume eclipsed up volume by more than 30:1 on the NYSE and by nearly 7:1 on the NASDAQ. The index put/call ratio rose 0.20 to 1.12. The equity put/call ratio rose 0.04 to close at 0.78.

Conclusion/Commentary

Thursday was actually set-up to see the bulls potentially move the major indexes higher with better than expected economic news and the expected interest rate reduction by the ECB. Draghi's speech, however, put the kibosh on a move higher as market participants were annoyed by the rhetoric that the ECB wouldn't be buying more European bonds.

In point of fact, this sets up the high drama of awaiting the results of the European summit which has already met with success with 23 members of the EU in agreement for stronger European Unity to the extent that they would actually have to change their constitutions.

We believe that the sell-off was rather muted and the evidence that the U.S. tech sector showed relative strength suggests that the bulls aren't yet done with this move higher. We are staying with our long positions and will monitor trading action on Friday to determine potential amplification of our positions.

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