1/11/2012 8:49:46 AM

Gap up open gives back some of the gains...

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Daily Trading Action

The major indexes opened higher and immediately dove for the first fifteen minutes before the bulls stepping in to move the markets higher for the remainder of the first hour of trading. A new leg lower began then that would last most of an hour before the bulls once again stepped in after the major indexes declined to new intraday lows. These lows would mark the nadir as the path would be a slow grind higher for the remainder of the day with the S&P-500 and Dow closing almost exactly where trading opened. The NASDAQ itself closed in positive territory but the NASDAQ-100, which had underperformed all other equity indexes we regularly monitor, closed in negative territory. The semiconductor index (SOX 386.28 +3.69) tacked on nearly one percent. The Russell 2000 (IWM 76.27 +1.10) closed back above its 200-Day Moving Average (DMA) gaining nearly 1.5%. The Dow Jones Transport Index (IYT 92.21 +1.31) added +1.4%. The Bank index (KBE 21.39 +0.27) added +1.3% while the Regional Bank Index (KRE 26.11 +0.18) added a fractional gain. The Finance Sector ETF (XLF 13.71 +0.24) added +1.7%. All equity index ETFs are in uptrend states with the noted exception of the Russell-2000. All equity indexes have a BULLISH BIAS. Long term bonds (TLT 118.32 -0.20) closed with a modest loss for the second consecutive session. It remains in a trading state and retains its BULLISH BIAS but is close to shifting. Trading volume was again light on the NYSE as was volume on the NASDAQ.

There was a single economic report released:

• Wholesale Inventories (Nov) increased +0.1% versus an expected +0.6% increase

The report was released a half of one hour after the open.

The U.S. dollar fell about one tenth of one percent, hardly something to cause a large equity market rally. Similarly, the Euro was nearly flat making little headway versus the dollar.

The yield for the 10-year note rose one basis point to close at 1.97. The price of the near term futures contract for a barrel of crude oil rose ninety-three cents to close at $102.24.

Implied volatility for the S&P-500 (VIX 20.69 -0.38) fell two percent and the implied volatility for the NASDAQ-100 (VXN 20.93 -0.29) fell one and one half of one percent. The VIX is at its six-month closing low and the VXN is quite near its respective low.

Market internals were positive with advancers leading decliners 10:3 on the NYSE and by 5:2 on the NASDAQ. Up volume led down volume 4:1 on the NYSE and by 3:1 on the NASDAQ. The index put/call ratio fell -0.30 to close at 1.10. The equity put/call ratio fell -0.03 to close at 0.57.

Conclusion/Commentary

Tuesday's market action showed why we adhere to the guidance, "Never short a dull market." The gap up open made it look like the bulls were just going to run things higher but the rally ran out of steam and equity indexes, for the most part, ended lower than they opened, but with solid gains none the less. Bond yields went up almost imperceptibly. In other words, bond markets aren't yet ready to sell-off with this money inevitably flowing into the stock market.

This market looks significantly like the U.S. stock market in early 2004. The market had risen in late 2003 as the risk trade was, once again, embraced. All that began to unravel early in the year with the risk trade leading the way downward into early August. That was an election year just eight years ago. The Presidential election cycle suggested it would be a good year for stocks and by the end of the year, it was. The continuous downward move until August was grueling for investors, especially investors in tech. Take a look at the S&P-500 and the sell-off was fairly mild but take a look at the semiconductor index and prices fell off a cliff.

Will we have a repeat of 2004? I don't know but there are a lot of similarities. We had an unpopular President (George W. Bush) seeking re-election. Deficit spending was a growing problem. We were coming off a strongly bouncing market, from fall 2002 to early 2004 then, from March 2009 now. History doesn't repeat itself, but it often rhymes. We are mindful of a correction we expect to begin in the first third of this year.

Did Tuesday's trading signal a top? We are not sure yet but we believe that we are close to putting in a top. We will continue to monitor trading to attempt to catch the top and reverse from our long positions.

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