1/25/2012 8:59:57 AM

Markets retrace most of their losses from a gap down open...

Recommendation:
Potential to buy puts, see conclusion.

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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.

Best ETFs to buy now (current positions):
Long DIA at $122.48
Long QQQ at $56.01
Long SPY at $126.17

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Value Portfolio:
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Daily Trading Action

The major indexes opened lower and immediately began fighting their way higher. The bears were able to regain control by late morning after the NASDAQ-100 moved back into positive territory but the major indexes were all slammed down until the bulls, once again, took charge with a bit more than two hours remaining. The march higher was uninterrupted for the remainder of the session save a scary dip that occurred with one half hour left to trade but the bulls fought even this off to leave the major indexes to closed with modest losses closing well above where they opened. The semiconductor index (SOX 414.54 +1.45) posted a fractional gain as did the Russell 2000 (IWM 78.60 +0.45). The Dow Jones Transport Index (IYT 92.88 -0.52) posted a fractional loss. The Bank index (KBE 21.59 -0.14) posted a fractional loss while the Regional Bank Index (KRE 26.35 +0.03) posted a modest gain. The Finance Sector ETF (XLF 14.17 -0.02) posted a modest loss. All equity indexes we regularly report on are above their respective 200-DMAs. All equity indexes have a BULLISH BIAS. Long term bonds (TLT 116.45 +0.21) posted a modest gain. It shifted to a downtrend state and shifted to a BEARISH BIAS. Trading volume was light on both the NYSE with 690M shares traded and on the NASDAQ with 1.597B shares traded.

There were no economic reports released. The first economic reports for the week are due out on Wednesday.

Materials were unchanged while four economic sectors moved higher including Consumer Discretionary +0.4%, Health Care +0.1%, Tech +0.1%, and Industrial +0.1%. The other five economic sectors in the S&P-500 moved lower led by Telecom -1.3%.

The U.S. dollar rose a tenth of one percent. The Euro fell almost imperceptibly.

The yield for the 10-year note fell one basis point to close at 2.06. The price of the near term futures contract for a barrel of crude oil rose thirty-seven cents to close at $98.95.

Implied volatility for the S&P-500 (VIX 18.91 +0.24) rose just over one percent as did the implied volatility for the NASDAQ-100 (VXN 19.74 +0.32).

Market internals were positive with advancers leading decliners 6:5 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 was nearly unchanging rising +0.02 to close at 1.85. The equity put/call ratio was also nearly unchanged falling -0.02 to close at 0.63.

Conclusion/Commentary

Tuesday's trading showed the resilience of this market as the liquidity fueled rally continues. While there are a number of reasons to doubt this rally (we have regularly stated our concerns), the market continues to move higher as bulls continue to see the glass as half full. The bear arguments are being heard and some market participants are voting with their feet and exiting long positions or adopting short positions.

Implied volatility did not increase much but had been elevated at the open. When the bulls stepped in to buy, implied volatility fell back to almost where it had closed after the previous session. Long-term bond priced moved up modestly in what appears to be a bounce in a down trend. The bounce was from oversold conditions and the weakness of the bounce suggests more downside ahead. If that money flows out of the bond markets into the equities markets it will support a continued rally.

The market appears to be approaching a top but wants to fool as many participants as possible. We believe that those participants that jumped in early into short positions will get squeezed out of them. Once they are back to cash or even long, the market will probably roll over catching the majority of traders out of position. While many will claim they saw the top coming, the key is to trade it.

Key levels to watch for potential breakouts are as follows:

• DIA $129 - $131 would signal a new high above 2011 to a new high above 2008
• QQQ has already broken above even its 2007 highs
• SPY $144 - $157.50 would signal a break above the 2008 and 2007 highs

We are still looking to add "insurance at a reasonable price" for our long positions. We are looking at the following strike prices and would like buy "in the money" puts expiring in May/June.

• DIA $126 or $127 on a nice bounce
• QQQ $60 or perhaps even $61
• SPY $131 or $132 on a bounce

If the market cooperates, we will achieve those positions as early as Wednesday, and will put out an intraday note to inform you of our entry levels and prices paid. The key is to secure a reasonable price for the options that will insulate us from downside risk of a significant move lower. We will adopt short positions when we believe we can actually see a top put in.

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