1/26/2012 9:06:35 AM

Bulls force some short covering...

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.

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- 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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Long DIA at $122.48
Long QQQ at $56.01
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Daily Trading Action

The major indexes opened mixed with the Dow and S&P-500 opening lower and the NASDAQ-100 opening about one percent higher on the back of Apple's (AAPL 446.66 +26.45) blowout earnings surprise. All three dipped in unison for the first half hour before the Dow and S&P-500 caught a bid. The NASDAQ-100 continued to press lows for just over the first hour of the session before the bears gave up and it joined the others in a move higher. The NASDAQ-100 never made it into negative territory and the three major indexes moved up with the only noticeable bear attack coming around 2:00pm. That attack was repulsed after a half hour and the major indexes closed at/near the highs of the day with both the Dow and S&P-500 posting fractional gains and the NASDAQ-100 posting a gain of more than one percent. The semiconductor index (SOX 416.45 +1.89) posted a fractional gain as did the Russell 2000 (IWM 79.27 +0.67). The Dow Jones Transport Index (IYT 94.13 +1.25) posted a gain of one and one third of one percent. The Bank index (KBE 21.71 +0.12) posted a gain of about one half of one percent as did the Regional Bank Index (KRE 26.48 +0.13). The Finance Sector ETF (XLF 14.20 +0.03) posted a modest 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 116.17 -0.28) posted a modest loss. It is in a downtrend state and had a BEARISH BIAS. Trading volume was light on the NYSE with 726M shares traded while it increased to about average on the NASDAQ with 1.838B shares traded.

In addition to the weekly crude oil inventory report and the release of the Fed's interest rate policy statement, there were three economic reports released:.

• MBA Mortgage Interest for last week fell -5.0%
• Pending Home Sales (Dec) fell -3.5% versus an expected -3.0% fall
• FHFA Housing Price Index (Nov) rose +1.0% versus October's -0.2% fall

The first report came out hours before the open while the latter two were released a half hour into the session.

The FOMC (Fed Open Market Committee) released the policy statement that left interest rates unchanged and stated that they expected to hold interest rates low into 2014. This statement was released at 12:30pm EST and fueled a rally that had begun after the open when it became known the Fed was likely to extend the timeframe of their pledge to keep interest rates low.

All ten economic sectors of the S&P-500 moved higher led by Materials +1.6%. The others in descending order were Utilities +1.6%, Industrials +1.2%, Energy +1.1%, Tech +1.0%, Consumer Staples +1.0%, Consumer Discretionary +0.7%, Health Care +0.7%, Telecom +0.3%, and Financials +0.2%.

The U.S. dollar fell four tenths of one percent. The Euro rose seven tenths of one percent. The trading action over the last few sessions appears to be short covering for bets placed against the Euro.

The yield for the 10-year note fell five basis points to close at 2.01. The price of the near term futures contract for a barrel of crude oil rose forty-five cents to close at $99.40. The U.S. government weekly report on crude oil inventories showed an increase of 3.56M barrels.

Implied volatility for the S&P-500 (VIX 18.31 -0.60) fell three percent and the implied volatility for the NASDAQ-100 (VXN 19.36 -0.38) fell two percent. Both are at levels just above lows not seen since the middle of 2011 or earlier.

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 fell -0.79 to close at 1.06. The equity put/call ratio was also nearly unchanged falling -0.06 to close at 0.57.

Conclusion/Commentary

Wednesday's trading forced some traders to cover short positions. The bullish optimism or complacence has made the U.S. equities markets somewhat immune to bear attacks until now. In addition, the negotiations with Greek bond holders to take a voluntary write down of a portion of their holdings have continued with various signs of success or collapse barely moving the market.

Implied volatility decreased modestly and the put/call ratio of equity indexes dropped dramatically. Bond markets and the U.S. dollar cooperated by moving lower which allowed an inverse move by U.S. equities.

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 didn't pull the trigger yesterday as it appears we are likely going to surge to test the DIA level referred to above. We will move up the strike prices and align them to the potential for a top when DIA hits these levels. The most likely strike prices for "in the money" puts expiring in May/June would be:

• DIA $129 or $130 on a nice bounce
• QQQ $61 or perhaps even $62
• SPY $135 or $136 on a bounce

If the market cooperates, we will achieve those positions this week, 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.