1/17/2012 8:38:57 AM

Monday was a holiday for U.S. markets (Martin Luther King Day).

It started out scary but turned into relatively modest losses by the close...

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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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Daily Trading Action

The major indexes opened lower and then dipped further in the opening fifteen minutes before snapping back to trade higher in the next fifteen minutes. Both the S&P-500 and the NASDAQ-100 moved above their respective opening levels but the Down never rose that much before all three again rolled over and began a race downward. That race only lasted about thirty minutes before the major indexes found their intraday bottoms down more than one percent from Thursday's closing levels. The rest of the morning was spent battling higher before the lunch hour saw a sell-off that lasted into early afternoon. From there, it the bulls kept buying into the close for all three major indexes to close higher than their lower opens but all of them closed with fractional losses. The Dow and S&P-500 are now in trading states while the NASDAQ-100 was able to maintain its uptrend state. The semiconductor index (SOX 383.47 -8.28) fell more than two percent closing back below its 200-Day Moving Average (DMA) having lasted above that level only a single day but it is still in an uptrend state. The Russell 2000 (IWM 76.39 -0.41) posted a fractional loss as did the Dow Jones Transport Index (IYT 92.24 -0.66). The Bank index (KBE 21.56 -0.05) and the Regional Bank Index (KRE 26.22 -0.11) both saw fractional losses as did the Finance Sector ETF (XLF 13.82 -0.10). Equity index ETFs are split with the NASDAQ-100, Semiconductors, Bank, Regional Bank, and Finance sector indexes in uptrend states and with the Dow, S&P-500, Russell-2000, and DJ Transport Index in trading states. All equity indexes have a BULLISH BIAS. Long term bonds (TLT 120.88 +1.19) added one percent which is below where they saw a gap up open. This allowed it to close back above its 20-DMA. It shifted to an uptrend state and retains its BULLISH BIAS. Trading volume was light on the NYSE and the NASDAQ.

There were four economic reports released:

• Trade Balance (Nov) came in at -$47.8B versus an expected -$44.0B
• Export Prices ex-agriculture (Dec) fell -0.2% as they did in November
• Import Prices ex-oil (Dec) rose +0.1%.
• UnivofMichigan Consumer Sentiment (Jan) came in at 74.0 versus an expected 71.2

The first three reports were released an hour before the open. The last report came out twenty-five minutes into the session.

The U.S. dollar rose eight tenths of one percent. The Euro fell a bit more than one percent finding a new closing low since August 2010.

Standard and Poors downgraded France a single notch from AAA to AA+. They also downgraded Austria in a similar fashion but maintained Germany's AAA rating. They also saing they would be looking at the rating for the European Financial Stability Fund (EFSF) for a possible downgrade (which then did over the long U.S. holiday weekend).

The yield for the 10-year note fell eight basis points to close at 1.85. The price of the near term futures contract for a barrel of crude oil fell forty cents to close at $98.70.

Implied volatility for the S&P-500 (VIX 20.91 +0.44) added two percent and the implied volatility for the NASDAQ-100 (VXN 21.38 +0.59) added three percent. The VIX and the VXN closed just above their six-month closing lows.

Market internals were negative with decliners leading advancers 2:1 on both the NYSE and the NASDAQ. Down volume led up volume 3:1 on the NYSE and by most of 2:1 on the NASDAQ. The index put/call ratio fell -0.41 to close at 0.84. The equity put/call ratio rose +0.04 to close at 0.61.

Conclusion/Commentary

Friday's market action again showed resilience after the initial sell-off. Clearly there are market participants who believe that the economic recovery being seen makes stocks attractive over the fear of loss due to a slowdown in the global economy due to concerns over European sovereign debt and the austerity measures that European nations have adopted.

With all the equity indexes we follow still above their 200-DMAs (with the semiconductor index notes as the sole exception), equity investors seem content to ride a wave higher. At the same time, bond investors also have maintained the longer-term bonds at a price point above its 200-DMA as well. We believe that the trading action on Friday signals that equity markets still want to move higher. While we have been looking to position short on a sign of top, we have not yet seen a high probability reversal so we have maintained our long positions. We did get the reversal of the S&P-500 right at the resistance level dating back to the July 18th 2011 low. As we already stated, we expected this was likely and now we believe it is equally likely the S&P-500 will be able to overcome this level.

We are still looking for a top but would not want to step in the way of this bullish onslaught until we get a high probability set-up for a reversal in market participant behavior.

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