1/20/2012 8:56:14 AM

The bears have been unable to gain advantage so continue to backpedal...

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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 higher followed a modest move higher in the first half hour but a quick dip followed on the release of an economic report at the top of the hour. The dip was modest and lasted only five minutes before the bulls once again seized control to drive the major indexes higher the remainder of the morning. The afternoon was spent grinding sideways to lower until a rally in the final hour allowed the major indexes to finish above their higher open with all the major indexes adding fractional gains. The semiconductor index (SOX 412.11 +7.51) added most of two percent. The Russell 2000 (IWM 78.20 +0.48) added a fractional gain. The Dow Jones Transport Index (IYT 94.52 +1.53) soared +1.6%! The Bank index (KBE 21.50 -0.04) fell modestly and the Regional Bank Index (KRE 26.18 -0.10) posted a fractional loss. The Finance Sector ETF (XLF 14.05 +0.13) tacked on most of one percent. All equity indexes we regularly report on are above their respective 200-DMAs. All equity indexes have a BULLISH BIAS. Long term bonds (TLT 118.32 -1.65) slid -1.4% collapsing back below its 20- and 50-Day Moving Averages (DMAs). It is in a trading state and retains its BULLISH BIAS but has signaled a potential shift to a bearish bias by next week. Trading volume was light on the NYSE with 701M shares traded while just below average on the NASDAQ with 1.700B shares traded.

In addition to the weekly crude oil inventory report, there were seven economic reports released:

• Initial Jobless Claims for last week came in at 352K versus an expected 385K
• Continuing Jobless Claims came in at 3.432M versus an expected 3.600M
• CPI (Dec) came in flat (+0.0%) versus an expected +0.1%
• Core CPI (Dec) came in at +0.1% as expected
• Housing Starts (Dec) came in at 657K versus an expected 673K
• Building Permits (Dec) came in at 679K versus an expected 680K
• Philadelphia Fed Index (Jan) came in at 7.3 versus an expected 10.0

With the exception of the Philly Fed Index, all reports were released an hour before the open.

Utilities -0.8% declined and Health Care was unchanged. The other eight economic sectors in the S&P-500 moved higher led by Industrials +0.9% and with the laggards being Consumer Staples +0.2% and Telecom +0.2%. Clearly, the traditional safe or defensive sectors continue to underperform in the "risk on" trade.

The U.S. dollar fell one half of one percent. The Euro rose eight tenths of one percent. This represents a break down for the dollar and a break up for the Euro.

The yield for the 10-year note rose seven basis points to close at 1.97. The price of the near term futures contract for a barrel of crude oil fell ten cents to close at $100.49. The weekly U.S. government report on crude oil inventories showed a drawdown of 3.438M barrels.

Implied volatility for the S&P-500 (VIX 19.87 -1.02) fell five percent as did the implied volatility for the NASDAQ-100 (VXN 20.27 -1.02). Both closed at new six-month lows.

Market internals were positive with advancers leading decliners 2:1 on the NYSE and by 3:2 on the NASDAQ. Up volume led down volume 2:1 on both the NYSE and the NASDAQ. The index put/call ratio fell -0.14 to close at 1.00. The equity put/call ratio fell -0.08 to close at 0.47.

Conclusion/Commentary

Thursday's trading saw a continuation of the "risk on" trade with the major indexes adding fractional gains and the leading indexes leading the way higher with relative outperformance. With the major indexes surpassing resistance on Wednesday, we are expecting a move back down to challenge that area as support. On Thursday, the Dow and S&P-500 signaled such a move as likely. With the characteristics of this bullish advance, we are hesitant to short this market without a clearer indication of a change in underlying sentiment.

We expect another shock from Europe or elsewhere might soon rattle the bullish sentiment that has probably become too complacent. With that said, this liquidity fueled advance (as money comes out of the bond market) could last longer than most market participants can remain in their short positions. We will stay long for at least one more session.

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