1/23/2012 9:02:09 AM

Google sinks the NASDAQ-100 but Dow tech stocks see the Dow challenge multi-month highs...

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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 414.34 +2.23) added more than one half of one percent. The Russell 2000 (IWM 78.25 +0.05) was able to post a modest gain. The Dow Jones Transport Index (IYT 94.08 -0.44) posted a loss of nearly one half of one percent. The Bank index (KBE 21.72 +0.22) added one percent and the Regional Bank Index (KRE 26.46 +0.28) added a bit more than that. The Finance Sector ETF (XLF 14.14 +0.09) added a fractional gain. All equity indexes we regularly report on are above their respective 200-DMAs. All equity indexes have a BULLISH BIAS. Long term bonds (TLT 116.98 -1.34) once again slip more than one percent breaking below support. It is in a trading state and shifted to a NEUTRAL BIAS. Trading volume was relatively light on the NYSE with 785M shares traded while average on the NASDAQ with 1.830B shares traded.

There was a single economic report released:

• Existing Home Sales (Dec) came in at 4.61M versus an expected 4.55M

The report was released a half hour before the open.

Earnings released before the open pushed and pulled the market. Google (GOOG 585.99 -54.58) slid eight percent on disappointing earnings dragging down the NASDAQ-100. On the other hand, Dow components IBM (IBM 188.52 +8.00), Intel (INTC 26.38 +0.75)m and Microsoft (MSFT 29.71 +1.59) all added nice gains to lead the Dow and S&P-500 higher. All three released earnings that pleased investors.

The U.S. dollar rose one tenth of one percent. The Euro fell three tenths of one percent.

The yield for the 10-year note rose six basis points to close at 2.03. The price of the near term futures contract for a barrel of crude oil fell -$2.16 to close at $98.33.

Implied volatility for the S&P-500 (VIX 18.28 -1.59) fell eight percent and the implied volatility for the NASDAQ-100 (VXN 19.87 -1.30) fell more than six percent. Both closed at the lowest levels since early July.

Market internals were positive with advancers leading decliners 7:5 on the NYSE and by 3:2 on the NASDAQ. Up volume led down volume 5:4 on both the NYSE and the NASDAQ. The index put/call ratio rose +0.24 to close at 1.24. The equity put/call ratio rose +0.05 to close at 0.52.

Conclusion/Commentary

Friday's trading was mixed driven primarily by mixed results for Tech giants. With two leading indexes ending higher and two lower, leadership is muddled. The banks made a strong come back which is happening more frequently as fear turns into complacency. This is a major concern we have now is that fear is turning into complacency. The risk of a larger downside move occurring is growing but judging precisely when it may take place during a liquidity fueled advance is perhaps the most difficult thing to do in trading.

We continue to expect that another shock from Europe or elsewhere will soon rattle the bullish sentiment that has grown to be 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.

The Dow closed essentially at its local top levels in July with the May highs less than one percent higher. To move any higher you would have to go back to the '08 highs in April and May and before that to the recent highs at the top of the market in Fall 2007. We believe the risk is beginning to outweigh the rewards and will be looking to add put protection in the coming week. You could institute them as early as Monday but we will research our options here.

Our assumptions are as follows:

• A significant correction is likely to happen no later than April of this year
• The market is currently overbought and a short term correction has become a very high probability
• The chance of a significant exogenous event changing the overly complacent bullishness has grown to become a dominant probability
• We have some signs that major indexes are topping here

We may provide an intraday update on Monday but will certainly provide some put buying recommendations in the near term. It is most likely that these recommendations will involved options expiring after the April time frame. We may enter positions in a layered approach but will provide more specifics in an update. We will also look to get short the market when we have confirmation of a top, rather than short the market in the face of a potential liquidity fueled rally.

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