1/19/2012 9:05:12 AM
Short covering fuels rally...
Unexpected gains in financials fuels short covering rally...
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Daily Trading Action
The major indexes opened mixed with the Dow lower, the S&P-500 nearly flat, and the NASDAQ-100 higher. From there, the move in the first five minutes was modestly lower before the bulls took control and began punishing the shorts. There was a respite for the bears in the late morning but the bulls pressed the attack through the lunch hour took a break in mid-afternoon and then pushed higher into the close. It appeared to be a classic case of short covering as too many eager traders elected to "short a dull market". The major indexes finished higher with the Dow up eight tenths of one percent and the other two finishing more than one percent higher on the day. All equity indexes we regularly monitor are in uptrend states. The semiconductor index (SOX 404.60 +15.38) added four percent moving back above its 200-Day Moving Average (DMA). The Russell 2000 (IWM 77.72 +1.36) added +1.8%. The Dow Jones Transport Index (IYT 92.99 +0.93) added one percent. The Bank index (KBE 21.54 +0.17) posted a fractional gain as did the Regional Bank Index (KRE 26.28 +0.18). The Finance Sector ETF (XLF 13.92 +0.21) tacked on +1.5%. All equity indexes we regularly report on are above their respective 200-DMAs. All equity indexes have a BULLISH BIAS. Long term bonds (TLT 119.97 -1.47) fell more than one percent. It is trading above all three moving averages we regularly report on but shifted to a trading state and retains its BULLISH BIAS. Trading volume was light on the NYSE with 790M shares traded while just below average on the NASDAQ with 1.710B shares traded.
There were seven economic reports released:
- MBA Mortgage Index for last week rose 23.1% versus the prior week's 4.5% rise
- PPI (Dec) fell -0.1% versus an expected rise of +0.1%
- Core PPI (Dec) came in at +0.3% versus an expected +0.1%
- Net Long-term TIC Flows (Nov) came in at $59.8B
- Industrial Production (Dec) rose 0.4% versus an expected 0.5% rise
- Capacity Utilization (Dec) came in at 78.1% as expected
- NAHB Housing Index (Jan) came in at 25 versus an expected 21
With the exception of the NAHB Housing Index, all reports were released before the open.
Utilities and Consumer Staples were unchanged but the other eight economic sectors of the S&P-500 rose led by Financial (+1.7%), Tech (+1.6%), and Consumer Discretionary (+1.6%). With traditional safe or defensive sectors underperforming, the "risk on" trade dominated.
The U.S. dollar fell nine tenths of one percent. The Euro rose one percent.
The yield for the 10-year note rose five basis points to close at 1.90. The price of the near term futures contract for a barrel of crude oil fell sixteen cents to close at $100.59.
Implied volatility for the S&P-500 (VIX 20.89 -1.31) fell six percent and the implied volatility for the NASDAQ-100 (VXN 21.29 -0.92) fell four percent. Both essentially reversed gains they made in the prior session.
Market internals were positive with advancers leading decliners 4:1 on the NYSE and by 3:1 on the NASDAQ. Up volume led down volume 7:1 on the NYSE and by 4:1 on the NASDAQ. The index put/call ratio fell 0.07 to close at 1.14. The equity put/call ratio fell -0.04 to close at 0.55.
Conclusion/Commentary
Wednesday's market action was primarily propelled by a situation that didn't get any worse in Europe with the International Monetary Fund (IMF) announcing that it would like to increase its lending. Economic reports were somewhat mixed but Goldman Sachs (GS 104.31 +6.63) gained six percent on the day after announcing better than expected earnings. The pessimism that has existed over banks is starting to unravel this year, even after the set-back when Citigroup (C 29.03 +0.81) reported an earnings short fall the day before.
The key resistance level for the S&P-500 dating back to the July 18th low was overcome with the S&P-500 closing at 1308.04. This is decidedly bullish and the 1296 level will likely become the new level of support the bears will attack.
With all the equity indexes we follow still above their 200-DMAs, 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. Bonds slipped Wednesday as did the U.S. dollar. This gives an edge to equity bulls at this time. With that said, equity indexes are in overbought territory here so we are again looking for signs of a top. Since we don't have a high probability of a reversal just yet, we are going to be patient and remain long for now.
We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.
