1/13/2012 9:08:36 AM

Bullish sentiment allows market to fight off the bears...

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Daily Trading Action

The major indexes opened higher and began to move immediately lower in selling that lasted for the first hour and fifteen minutes which moved the major indexes into negative territory but never reached down more than one percent from the gap up open. From there, the bulls began buying in an effort that lasted through the session until the final ten minutes saw the bears push the indexes lower to close off their highs. All equity indexes that we regularly report on added gains. The semiconductor index (SOX 391.75 +3.86) added on percent and closed back above its 200-Day Moving Average (DMA). The Russell 2000 (IWM 76.80 +0.23) and the Dow Jones Transport Index (IYT 92.90 +0.30) both added fractional gains. The Bank index (KBE 21.61 +0.05) and the Regional Bank Index (KRE 26.33 +0.11) added fractional gains as did the Finance Sector ETF (XLF 13.92 +0.05). All equity index ETFs are in uptrend states and all closed above all three moving averages were regularly report on. All equity indexes have a BULLISH BIAS. Long term bonds (TLT 119.69 -0.17) posted a fractional loss being held below resistance. It remains in a trading state and retains its BULLISH BIAS. Trading volume was again light at 770M shares traded on the NYSE. Similarly, with just 1.670B shares traded, volume was light on the NASDAQ.

There were six economic reports released:

• Initial Jobless Claims for last week came in at 399K versus an expected 375K
• Continuing Jobless Claims came in at 3.628M versus an expected 3.600M
• Retail Sales (Dec) rose +0.1% versus an expected +0.4% rise
• Retail Sales ex-Auto (Dec) fell -0.2% versus an expected +0.3% rise
• Business Inventories (Nov) rose +0.3% versus an expected +0.5%
• Treasury Budget (Dec) fell -$86.0B versus an expected -$84.0B

The first four reports were released an hour before the open. The next report came out a half hour into the session with the final report released two hours before the close. Market participants seemed to ignore the bad news from the reports released before the open in favor of riding the coat tails of positive European markets. Europe was buoyed by a lack of bad news and with favorable yield drops in sovereign debt auctions.

The U.S. dollar fell two thirds of one percent as the Euro rose nearly one percent. We had predicted the bounce but we now need to see whether it is more than a bounce in a downtrend or a reversal.

Seven out of ten economic sectors in the S&P-500 moved higher led by Materials +1.5% which was the only sector to gain more than one percent. Consumer Staples -0.1%, Utilities -0.2%, and Energy -0.9% were the losing sectors. HealthCare +0.2% was the weakest sector to post a gain which makes the "safety" trade a relative underperformer, i.e. the "risk on" trade is dominating at this time.

The yield for the 10-year note rose three basis points to close at 1.93. The price of the near term futures contract for a barrel of crude oil slid -$1.77 to close at $99.10.

Implied volatility for the S&P-500 (VIX 20.47 -0.58) fell three percent and the implied volatility for the NASDAQ-100 (VXN 20.79 -0.39) fell two percent. That is a new six-month closing low for the VIX with the VXN just above its six-month closing low.

Market internals were positive with advancers leading decliners 8:5 on both the NYSE and the NASDAQ. Up volume led down volume 3:2 on the NYSE and by 2:1 on the NASDAQ. The index put/call ratio fell -0.05 to close at 1.25. The equity put/call ratio rose +0.02 to close at 0.57.

Conclusion/Commentary

Thursday's market action showed resilience after the initial sell-off. Clearly there were market participants who believe the economic reports that came out worse than expected would be enough to stop the bullish onslaught and they were stung with losses as the bulls pushed the indexes back up and over the gap up open levels. Still, the major indexes look like they are forming a top.

The S&P-500 achieved a close that was higher than its high in October. With that said, it is right at a point of major resistance level dating back to support area in mid-July 2011. A reversal off of this reversal area is to be expected but if the market sends the S&P-500 through this level, the market is likely to continue higher still.

We have been calling for a top to occur this week and Thursday may have been that date. Unfortunately, we have had no confirmation that the top is indeed in. While we have been bearish, this isn't enough to change our positions. U.S. indexes will likely have a gap down open on Friday, but bullish buyers may still step in. The major indexes are now overbought but could yet become more overbought. A close lower on Friday may allow enough of the overbought condition to be worked off to still allow the bulls to continue to move the market higher. While we have been waiting impatiently to enter short positions, we might be premature to enter them at this time. We will wait to reverse our trade until we see how the market finishes trading on Friday.

Monday is a holiday for U.S. markets (Martin Luther King Day) so we will put out our next alert before the open on Tuesday.

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