1/12/2012 9:01:52 AM

Market muddles higher after a gap down open...

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Daily Trading Action

The major indexes opened lower and moved first up in the opening minutes then down into the top of the hour. Just after the top of the hour they turned up and that would market the intraday bottom. While there would be one more pull-back later in the morning, no new low was hit and the direction for most of the rest of the session was higher. If not for a modest sell-off in the final hour all three major indexes may have finished in positive territory. The Dow, however, closed down about one tenth of one percent while the S&P-500 was able to finish in positive territory as was the NASDAQ-100, which handily outperformed the other two. The semiconductor index (SOX 387.89 +1.61) added a fractional gain closing just under its 200-Day Moving Average (DMA). The Russell 2000 (IWM 76.57 +0.30) added a fractional gain as well. The Dow Jones Transport Index (IYT 92.60 +0.39) mimicked the other leading indexes as well. The Bank index (KBE 21.56 +0.17) added most of one percent and closed above its 200-DMA for the first time since May 2011. The Regional Bank Index (KRE 26.22 +0.11) added a fractional gain. The Finance Sector ETF (XLF 13.87 +0.16) added a bit more than one percent outperforming all other equity indexes we regularly report on. All equity index ETFs are in uptrend states. All equity indexes have a BULLISH BIAS. Long term bonds (TLT 119.86 +1.54) rose +1.3% and is at resistance. A turn lower here would likely set-up equities for a surge higher. A continuation higher will likely cause equity indexes to reverse their upward path. It remains in a trading state and retains its BULLISH BIAS but is close to shifting. Trading volume was again light at 759M shares traded on the NYSE. Similarly, with just 1.630B shares traded, volume was light on the NASDAQ.

In addition to the weekly crude oil inventory report and the release of the Fed Beige book, there was a single economic report released:

• MBA Mortgage Purchase Index for last week rose +4.5% versus the prior week's -3.7%

The report was released two and one half hours before the open. The Fed's Beige book didn't hold anything that was market moving either way.

The U.S. dollar rose four tenths of one percent as the Euro fell on half of one percent. The Euro looks set to bounce here. Whether it is more than a bounce in a downtrend or a reversal is yet to be seen.

Six out of ten economic sectors in the S&P-500 moved higher led by Financials +1.0. Health Care was unchanged and Utilities -0.4%, Consumer Staples -0.6%, and Energy -1.3% moved lower. With the exception of Energy, the lagging sectors are the "safety" sectors that did so well in 2011.

The yield for the 10-year note slid seven basis points to close at 1.90. The price of the near term futures contract for a barrel of crude oil slid -$1.37 to close at $100.87. The weekly U.S. government report showed a gain of 4.958M barrels.

Implied volatility for the S&P-500 (VIX 21.05 +0.36) rose most of two percent and the implied volatility for the NASDAQ-100 (VXN 21.18 +0.25) rose one percent. Both the VIX are just above their six-month closing lows.

Market internals were positive with advancers leading decliners 5:4 on the NYSE and by 3:2 on the NASDAQ. Up volume led down volume 2:1 on the NYSE and by 3:2 on the NASDAQ. The index put/call ratio rose +0.20 to close at 1.30. The equity put/call ratio fell -0.02 to close at 0.55.

Conclusion/Commentary

Wednesday's market action showed resilience after a gap down open. There was little in the way of economic news and we are in earnings season without a lot to sway things. However, continued worries about European sovereign debt saw European bourses trading lower which cause U.S. markets to open lower in sympathy. The resilience of the U.S. market on continued light volumes is a reason to not, "short a dull market." We have been looking for an opportunity to go short but have not yet seen signs of a top. Bond market yields dropped significantly with a corresponding gain in prices.

There is significant concern over European banks and lending rates for interbank lending have been elevated for months achieving a new steeper slope to the climb from late July of last year. Since the beginning of the year, rates have not continued to climb as they did in 2007/2008. While they are elevated at levels not seen since the recent global financial crisis, the levels are still well below what was seen during that time frame. We will continue to monitor the TED spread as an easing of it would indicate that tensions are lowering.

We are intensely watching bond prices as a sell-off would fuel a move higher by equities markets. While we continue to look for a top, it is possible the markets can continue to move higher here and we want to be careful not to get caught in a liquidity fueled rally. Rather, we would like all the bulls to commit funds and the shorts to cover their positions before we enter such a trade. Until then, we impatiently wait for a top to be signaled.

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